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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
September 2013:
IRS 2014 Budget:
Improvements Made to Budget Request and Cost Estimate, but Further
Actions Needed:
GAO-13-835:
GAO Highlights:
Highlights of GAO-13-835, a report to congressional committees.
Why GAO Did This Study:
The financing of the federal government depends largely on IRS’s
ability to administer the tax laws, which includes providing service
to taxpayers and enforcing the law to ensure everyone pays the taxes
they owe. For fiscal year 2014, the President requested $12.9 billion
for IRS, an increase of 9 percent over fiscal year 2012 actual levels.
Because of the size of IRS’s budget and the importance of its
programs, GAO was asked to review the fiscal year 2014 budget request.
In April and May 2013, GAO reported preliminary observations on IRS’s
budget. Among other things, this report assesses how IRS prioritizes
new initiatives; steps IRS has taken to improve the PPACA cost
estimate and the reporting transparency of the related IT investment;
and the type of information available in the budget justification
about major IT systems. To address these objectives, GAO reviewed the
fiscal year 2014 budget justification, compared the updated PPACA cost
estimate to GAO’s Cost Estimating and Assessment Guide, and
interviewed IRS Corporate Budget officials.
What GAO Found:
For the fiscal year 2014 budget formulation process, the Internal
Revenue Service (IRS) implemented a new process that uses templates to
help screen, prioritize, and select new initiatives before detailed
business cases are developed to support funding requests. The template
information that GAO reviewed varied in detail and scope; for some,
IRS guidance may have contributed to incomplete submissions to senior
leadership. According to Office of Management and Budget Circular A-
94, in order to evaluate and compare funding initiatives, decision-
makers need to be aware of benefits, costs, and strategies related to
achieving program goals. By improving guidance on the type of data to
include, IRS could help ensure the templates are fully completed.
IRS significantly improved its Patient Protection and Affordable Care
Act (PPACA) cost estimate. In particular, the December 2012 estimate
is more comprehensive, reflecting the full life-cycle cost of the
program—-estimated at $1.89 billion for fiscal year 2010 through 2026.
A few areas of improvement remain, primarily regarding the accuracy
and credibility of the cost estimate. For example, IRS showed how the
December 2012 estimate differed from the previous estimate, but did
not explain the factors that resulted in the variances. In addition,
IRS did not obtain a second cost estimate that could be used to assess
the reasonableness of the $1.89 billion estimated program costs.
Table: Overall Assessment of PPACA Cost Estimate Alignment with Best
Practices:
Best practice: Comprehensive;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Substantially meets.
Best practice: Well documented;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Substantially meets.
Best practice: Accurate;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Partially meets.
Best practice: Credible
October 2010 cost estimate: Minimally meets; Updated December 2012
cost estimate: Partially meets.
Key:
Substantially meets: IRS provided evidence that satisfies a large
portion of the criterion.
Partially meets: IRS provided evidence that satisfies about half of
the criterion
Minimally meets: IRS provided evidence that satisfies a small portion
of the criterion.
Source: GAO analysis of IRS documentation.
[End of table]
Although the information technology (IT) systems for PPACA met dollar
thresholds (as outlined in the Department of Treasury’s guidance) as a
major investment for public reporting, IRS did not report this as
such. Officials told GAO they did not have time to prepare the
information for the fiscal year 2014 budget justification, but plan to
do so for fiscal year 2015. Until IRS publicly reports the IT systems
for PPACA as a major investment, transparency about these systems’
implementation and administration is limited.
Although IRS included new and useful information on its major IT
investments in the budget justification (such as life-cycle costs)
other important information (such as the start date and percent of
life-cycle costs obligated) is reported elsewhere or must be
calculated. IRS officials said they could consolidate this information
for ease of review. Consolidating key budget and performance data
would ensure Congress has comprehensive, easily accessible information
on major IT investments to guide decisions.
What GAO Recommends:
GAO recommends that IRS improve budget formulation guidance for new
initiatives; improve the accuracy and credibility of future updates to
the PPACA cost estimate as well as report the related IT investment
publicly; and consolidate major IT investment reporting. IRS agreed
with three of GAO’s four recommendations and agreed with the majority
of the actions associated with improving the accuracy and credibility
of the PPACA cost estimate.
View [hyperlink, http://www.gao.gov/products/GAO-13-835]. For more
information, contact James R. McTigue, (202) 512-9110, or
mctiguej@gao.gov.
[End of section]
Contents:
Letter:
Background:
IRS Can Report Some Program-Level Obligations and FTE Data:
New Budget Formulation Process Identifies Priorities and Reduces Some
Work, but Guidance is Insufficient:
IRS Identified Potential Savings in Its Base Budget:
IRS Developed New Revenue Protection and Revenue Enhancement ROI
Projections:
IRS Significantly Improved Its PPACA Cost Estimate, but Did Not
Publicly Report Investment Information for the Fiscal Year 2014 Budget
Request:
IRS Expanded Information Reported on Its Major IT Investments in the
Fiscal Year 2014 Budget Justification, but Additional Information
Would Be Useful:
IRS Implemented Six of Our Nine Prior Recommendations to Improve the
Budget Presentation and Aid Decision Making:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Non-Interactive Version of Figure 1: IRS's Budget
Formulation Structure:
Appendix III: Figure 8: Pre-selection Budget Formulation Process --
Sample Template:
Appendix IV: Reliability of Patient Protection and Affordable Care Act
Cost Estimate:
Appendix V: Summary of IRS's Major Information Technology (IT)
Investments:
Appendix VI: Comments from the Internal Revenue Service:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for
Selected Program Activities, Organizational Entities, and Other
Efforts of Interest:
Table 2: Fiscal Year 2014 Projected Base Budget Savings (in Millions):
Table 3: Overall Assessment of PPACA Cost Estimate Alignment with Best
Practices:
Table 4: Summary of IT Investment Data Presented in the Fiscal Year
2014 Congressional Budget Justification for IRS and Exhibit 300:
Table 5: Prior GAO Recommendations Implemented by IRS:
Table 6: Budget-Related Recommendations to IRS That Remain Open:
Table 7: Non-Interactive Version of Figures 9 through 12: PPACA Cost
Estimate Alignment with Best Practices Outlined in the GAO Cost Guide:
Figures:
Figure 1: IRS Budget Formulation Structure:
Figure 2: Alignment of Budget Execution Fund Centers to IRS's
Organizational Structure:
Figure 3: Location of Appeals Fund Center Obligations in IRS's Budget
Formulation Structure:
Figure 4: Location of Wage and Investment Fund Center Obligations in
IRS's Budget Formulation Structure:
Figure 5: Overview of IRS's Pre-selection Budget Formulation Process
for Fiscal Year 2014:
Figure 6: Projected ROI for Improve Identification and Prevention of
Refund Fraud and Identity Theft Initiative:
Figure 7: Projected ROI for Leverage Data to Improve Case Selection
Initiative:
Figure 9: PPACA Cost Estimate Alignment with Best Practices for
Comprehensiveness:
Figure 10: PPACA Cost Estimate Alignment with Best Practices for Being
Well Documented:
Figure 11: PPACA Cost Estimate Alignment with Best Practices for
Accuracy:
Figure 12: PPACA Cost Estimate Alignment with Best Practices for
Credibility:
Abbreviations:
ACA IT: Affordable Care Act information technology:
BSM: Business Systems Modernization:
DME: development, modernization and enhancement:
FTE: full-time equivalent:
GPRA: Government Performance and Results Act:
HHS: Department of Health and Human Services:
IRDM: Information Reporting and Document Matching:
IRS: Internal Revenue Service:
IT: information technology:
MeF: Modernized e-File:
OMB: Office of Management and Budget:
PPACA: Patient Protection and Affordable Care Act:
ROI: return on investment:
Treasury: Department of Treasury:
[End of section]
GAO:
United States Government Accountability Office:
441 G St. N.W.
Washington, DC 20548:
September 26, 2013:
The Honorable Tom Udall:
Chairman:
The Honorable Mike Johanns:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate:
The Honorable Charles W. Boustany, Jr. Chairman:
The Honorable John Lewis:
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
The financing of the federal government depends largely upon the
Internal Revenue Service’s (IRS) ability to collect taxes, including
providing taxpayers services to make voluntary compliance easier and
enforcing tax laws to ensure everyone meets their obligation to pay
taxes.
For fiscal year 2014, the President requested a $12.9 billion budget
for the IRS. This is an increase of 9 percent ($1,044 million) in
discretionary funding over the fiscal year 2012 appropriation, and an
increase of 8 percent (6,732 full-time equivalents) in staffing over
the fiscal year 2012 actual levels.[Footnote 1] In April and May of
2013, we reported preliminary observations on the fiscal year 2014
budget request for IRS; we also reported budget and staffing trends
from fiscal year 2010 through 2014, work we conducted related to
proposals highlighted in the President’s budget request, and
reductions to the fiscal year 2013 budget for IRS that were due to the
continuing resolution and sequestration.[Footnote 2] Specific
amounts requested for fiscal year 2014 for IRS’s four appropriation
accounts are $5.7 billion for enforcement, $4.5 billion for operations
support, $2.4 billion for taxpayer services, and $301 million for
Business Systems Modernization (BSM).[Footnote 3]
Because of the size of IRS’s budget and the importance of its service
and compliance programs for all taxpayers, you asked us to review the
fiscal year 2014 budget request for IRS. In this report we (1)
describe IRS’s capacity to report fiscal year 2012 obligations and
FTEs by program activity, organizational entity, and other efforts of
interest; (2) assess IRS’s process and the type of information used to
prioritize and select new program initiatives; (3) describe proposed
base budget savings; (4) describe IRS’s new projected return on
investment (ROI) methodologies; (5) evaluate steps IRS took to improve
the cost estimate for the Patient Protection and Affordable Care Act
(PPACA)[Footnote 4] in accordance with GAO’s Cost Estimating and
Assessment Guide (GAO Cost Guide)[Footnote 5] and determine the extent
to which IRS is transparently reporting on the Affordable Care Act
(ACA) information technology (IT) investment; (6) summarize IRS’s
major IT investments and assess the type of information available in
the congressional justification; and (7) describe IRS’s progress in
implementing our prior budget-related recommendations.
To conduct this work for all objectives, we reviewed key documents,
such as the fiscal year 2014 congressional budget justification for
IRS and IRS’s Financial Management Handbook. For the first objective,
we analyzed inputs and outputs to the budget formulation process, and
determined IRS’s ability to report information for eight program
activities, organizational entities, and efforts of interest. For the
second objective, we reviewed guidance related to IRS’s pre-selection
budget formation process, and reviewed submissions for completeness
against criteria outlined in the Office of Management and Budget (OMB)
Circular A-94.[Footnote 6]
For the third objective, we reviewed supporting documents obtained from
IRS on its proposed fiscal year 2014 budget savings. For the fourth
objective, we reviewed relevant studies on methods to calculate ROI. For
the fifth objective, we analyzed the updated PPACA cost estimate and
compared it to the characteristics of a high-quality cost estimate, as
identified in the GAO Cost Guide. For the sixth objective, we reviewed
Exhibit 300 “capital asset summaries,” prepared by IRS for major IT
investments, as well as IRS and OMB guidance on preparing those
documents, such as the Office of Management and Budget Guidance on
Exhibits 53 and 300—Information Technology and E-Government. For the
seventh objective, we obtained information on prior year budget
recommendations from various IRS officials and reviewed relevant
documentation to determine if they were implemented. In addition, we
interviewed IRS officials, including those from the Corporate Budget
Office, selected business units, the Office of Compliance Analytics, and
the Affordable Care Act program office. We spoke with IRS officials and
reviewed data collection procedures and determined that the data used in
this report were sufficiently reliable for our purposes
We conducted this performance audit from October 2012 to September
2013 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives. For further
details on our scope and methodology, see appendix I.
Background:
IRS Budget Formulation and Execution Structures:
IRS formulates its budget at three levels: appropriation account,
budget activity, and program activity, as shown in figure 1. (See
appendix II for the non-interactive figure of IRS's budget formulation
structure.) The annual budget request for IRS presents funding and FTE
data at the appropriation and budget activity levels. IRS formulates
its budget to align with its strategic goals, which is an intended
outcome of the Government Performance and Results Act of 1993 (GPRA).
[Footnote 7]
Figure 1: IRS Budget Formulation Structure:
[Refer to PDF for image: interactive graphic]
Directions: For listings of specific program activities, mouseover the
number of program activities in the circles below.
To print full text version of this graphic, go to appendix II.
Source: GAO analysis of IRS documents.
Note: The number of program activities varies from one fiscal year to
the next as IRS adjusts its budget formulation structure to address
emerging priorities. Program activities are described in detail in the
fiscal year 2014 congressional budget justification for IRS.
[End of figure]
IRS executes its budget by allocating funds from its appropriation
accounts to fund centers. Fund centers manage and distribute funds and
allocate funds to sub-units, known as cost centers, where funds are
obligated.
IRS's appropriation accounts align with its organizational structure
at the highest level. For example, IRS has an Operations Support
appropriation account and an Operations Support commissioner-level
organization. In addition, IRS's organizational structure tracks
roughly to its budget execution structure, which is made up of three
types of fund centers: (1) support, (2) functional, and (3) operating.
(See figure 2.)
Figure 2: Alignment of Budget Execution Fund Centers to IRS's
Organizational Structure:
[Refer to PDF for image: organizational chart]
Top level: IRS Commissioner[A].
Second level, reporting to IRS Commissioner:
Operations Support[A]:
* Agency-Wide Shared Services[B];
* Chief Financial Officer[B];
* Chief Technology Officer[B];
* IRS Human Capital Officer[B];
* Privacy, Governmental Liaison and Disclosure[B].
Services and Enforcement[A]:
* Criminal Investigation[D];
* Large Business and International[C];
* Small Business and Self-Employed[C];
* Tax Exempt and Government Entities[C];
* Wage and Investment[C].
Other[A]:
* Appeals[D];
* Chief Counsel[D];
* Communications and Liaison[D];
* National Taxpayer Advocate[D].
Key:
[A] Commissioner level organizations.
[B] Support fund centers.
[C] Operating fund centers.
[D] Functional fund centers.
Source: GAO analysis of IRS documents.
Note: This graphic shows common elements between IRS's organizational
structure and budget execution structure. This illustration does not
include three fund centers that are not part of IRS's organizational
structure--Stewardship, Wage and Investment Stewardship, and Executive
Leadership and Direction. In addition, the illustration does not
include several units/functions identified in IRS's organizational
structure that are not fund centers.
[End of figure]
The lower levels of the budget formulation and budget execution
structures include (1) program activities, which break down the budget
activities and are listed above; and (2) organizational entities and
other efforts of interest, which are not discrete categories and are
different perspectives of IRS's organizational structure. For example,
Wage and Investment is one division within IRS and can be referred to
as an organizational entity, while identity theft would be considered
an area of interest that crosses divisions within IRS, including Wage
and Investment.
Alignment of Budget Execution and Formulation Processes:
Prior to the preparation of the annual budget request, IRS budget
staff ensure that FTE movements between budgetary accounts made during
the fiscal year (e.g., shifting staff to work on different issues)
match up with base budget resources assigned to each account. This
review (which is conducted by the IRS Corporate Budget Office in
coordination with business units) is necessary because business units
may have added or eliminated staff during the course of the fiscal
year, which can result in a misalignment of funding and FTEs during
budget formulation. Further, the review ensures that FTEs--which
represent the majority of IRS's budgetary resources--are fully funded
by appropriation accounts and that salary and benefits are aligned
with current FTE levels.
IRS Can Report Some Program-Level Obligations and FTE Data:
Obligations and FTE Data are Available for Some Program Activities,
Organizational Entities, and Efforts of Interest With Limitations:
In its annual budget request, IRS provides funding information at the
appropriation account and budget activity levels, but not at the more
detailed program activity level. IRS officials stated that they could
provide more information at the program activity level; however,
reporting on requested funding amounts for program activities could
limit IRS's flexibility to reprogram funds given statutory
restrictions.[Footnote 8] Still, as we reported in May 2010, IRS could
provide additional information that highlights new program activities
or those that are proposed for either expansion or reduction.[Footnote
9] This more detailed information could increase transparency and
demonstrate the agency's priorities to congressional decision makers.
As an alternative to more detailed information on requested funds, IRS
Corporate Budget officials told us they could provide prior year
obligations and FTE data in greater detail than reported in the annual
budget request, including information for some program activities,
organizational entities, and other efforts of interest. For eight
areas we selected as examples,[Footnote 10] IRS officials confirmed
that they could provide fiscal year 2012 obligations data for six and
partial information for one.[Footnote 11] They could not provide
information for one, as shown in table 1.
Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for
Selected Program Activities, Organizational Entities, and Other
Efforts of Interest:
Area description: Appeals[A];
Provides an independent, second review of IRS examination decisions;
Availability of fiscal year 2012 obligations data: Available.
Area description: Identity theft;
Identifies and prevents the issuance of fraudulent tax returns caused
by identity theft;
Availability of fiscal year 2012 obligations data: Partially available.
Area description: International exam and collections;
Addresses international tax and financial crimes, including
international tax evasion;
Availability of fiscal year 2012 obligations data: Available.
Area description: Merchant card and basis matching, and the related
Information Reporting and Document Matching (IRDM) IT system;
Establishes a new business tax return and information returns
pertaining to merchant card payments and cost basis of securities and
automatically matches information with the goals of increasing
voluntary compliance and accurate reporting of income;
Availability of fiscal year 2012 obligations data: Available.
Area description: Offshore voluntary disclosure program;
Encourages taxpayers with hidden offshore assets and income to
voluntarily come back into the tax system;
Availability of fiscal year 2012 obligations data: Not available.
Area description: Online services;
Develops new web-based taxpayer services tools;
Availability of fiscal year 2012 obligations data: Available.
Area description: Telephone & correspondence services;
Allows taxpayers and paid preparers to communicate with IRS customer
service representatives via phone and paper correspondence;
Availability of fiscal year 2012 obligations data: Available.
Area description: Wage & Investment[A];
Serves taxpayers whose primary income is derived from wages and
investments;
Availability of fiscal year 2012 obligations data: Available.
Key: Available = IRS can provide the data; Partially available = IRS
can provide some of the data; Not available = IRS cannot provide the
data.
Source: IRS Financial Management Code Handbook and discussions with
IRS Corporate Budget officials.
Notes: [A] To obtain both a simple and complex example of the
information available and we only requested fiscal year 2012
obligations data for the Appeals and Wage and Investment fund centers.
[End of table]
According to IRS officials, obligations data for identity theft are
only partially available because IRS tracks obligations attributed to
identity theft from its Wage and Investment fund center, which handles
most of its identity theft workload. However, IRS does not track
identity theft-related obligations incurred by other IRS business
units. According to a senior official, IRS plans to establish a
Servicewide internal order code for identity theft at the beginning of
fiscal year 2014 because it has become a long-term priority. Officials
said they were not able to provide fiscal year 2012 obligations data
for the offshore voluntary disclosure program because they had not
established a mechanism to track it (in part because the program was
operated as a short-term effort in the past and, according to
officials, has only recently been made permanent.) IRS has not decided
if it will track obligations for the offshore voluntary disclosure
program in the future.[Footnote 12]
According to IRS officials, IRS obligations data for program
activities, organizational entities, and other efforts of interest
have some limitations. For example, the data do not include indirect
costs, including costs associated with IRS-wide functions like human
capital management and procurement. In addition, obligations
associated with IT are tracked separately from non-IT costs in IRS's
financial management system. For example, non-IT costs for merchant
card and basis matching are tracked separately from the related
Information Reporting and Document Matching (IRDM) IT system.
Furthermore, organizational entities and other efforts of interest are
not discrete. Obligations can be analyzed in different ways, such as
from an organizational perspective or a program perspective. Different
analyses should not necessarily be summed together because they may
use different perspectives and, when considered together, might result
in overlaps or gaps. For example, organizational entities and other
efforts of interest have different perspectives where obligations may
be counted towards either. For instance, obligations for the Wage and
Investment fund center--an organizational entity--may overlap with
related efforts of interest, such as identity theft. Users of IRS
obligations data should be cognizant of these limitations.
Funding Streams for Obligations Data Vary in Complexity:
IRS's obligations data show how the elements of IRS's budget
formulation and budget execution structures described in figures 1 and
2 interact, and how those relationships vary in complexity. The data
demonstrate the funding streams for IRS's obligations: they show which
appropriation accounts, budget activities, and program activities in
IRS's budget formulation structure received appropriated funds, as
well as which fund centers within IRS's budget execution structure
managed and distributed the funds. Some fund centers in IRS's budget
execution structure receive appropriations from a relatively small
number of appropriations accounts, budget activities, and program
activities in IRS's budget formulation structure. For example, as
shown in figure 3, IRS obligated about $240 million from the Appeals
fund center in fiscal year 2012. While most Appeals fund center
resources come from the Appeals program activity, it also receives
funding from other parts of IRS's budget formulation structure,
including funds from the International exams program activity.
Figure 3: Location of Appeals Fund Center Obligations in IRS's Budget
Formulation Structure:
[Refer to PDF for image: illustration]
Appropriations account:
Enforcement: $240 million; 1,981 FTEs;
Operations support: Negligible[A]; 0 FTEs.
Budget activities:
Enforcement: Exam and collections: $240 million; 1,981 FTEs;
Operations support: Shared services and support: Negligible; 0 FTEs.
Program activities:
Exam and collections:
* Appeals: $216 million; 1,841 FTEs;
* Compliance services management: $15 million; 80 FTEs;
* International exams: $10 million; 60 FTEs;
Shared services and support:
* Real estate and facilities management: Negligible; 0 FTEs.
Appeals fund center: $240 million; 1,981 FTEs.
Source: GAO analysis of IRS fiscal year 2012 obligations data.
Note: Numbers may not add due to rounding.
[A] Negligible refers to obligations of less than $1,000.
[End of figure]
Obligations data for organizational entities and other efforts of
interest can also have a more complex relationship to IRS's budget
formulation structure than the Appeals example shown above. For
example, in fiscal year 2012 the Wage and Investment fund center
received funding from 3 of IRS's 4 appropriations accounts, 5 of its 9
budget activities, and 23 of its 83 program activities (see figure 4).
In addition, the ease with which IRS can compile obligations data
varies: it can be more difficult for IRS to compile obligations data
for programs with a more complex relationship to its budget
formulation and budget execution structures.
Figure 4: Location of Wage and Investment Fund Center Obligations in
IRS's Budget Formulation Structure:
[Refer to PDF for image: illustration]
Appropriations account:
Taxpayer services: $1.870 billion; 27,836 FTEs;
Enforcement: $471 million; 6,313 FTEs;
Operations support: $45 million; 419 FTEs;
Budget activities:
Taxpayer services: Pre-filing taxpayer assistance and education: $354
million; 3,502 FTEs;
Taxpayer services: Filing and account services: $1.516 billion; 24,334
FTEs;
Enforcement: Exam and collections: $442 million; 5,893 FTEs;
Enforcement: Investigations: $30 million; 420 FTEs;
Operations support: Shared services and support: $45 million; 419 FTEs.
Program activities:
Pre-filing taxpayer assistance and education:
* Pre-filing services management: $2 million; 15 FTEs;
* Taxpayer communication and education: $88 million; 544 FTEs;
* Media and publications: $63 million; 583 FTEs;
* Account management and assistance, field assistance: $149 million;
2,006 FTEs;
* Wage and Investment management, headquarters $52 million; 354 FTEs;
Filing and account services:
* Filing and account services management: $3 million; 20 FTEs;
* Submission processing: $493 million; 8,822 FTEs;
* Account management and assistance, electronic and correspondence
assistance: $952 million; 14,988 FTEs;
* Electronic products and services support: $25 million; 305 FTEs;
* Pre-refund: $8 million; 30 FTEs;
* Health care tax administration: $15 million; 9 FTEs;
* Joint operations center: $19 million; 160 FTEs;
Exam and collections:
* Compliance services management: $28 million; 203 FTEs;
* Payment compliance, correspondence collection: $72 million; 990 FTEs;
* Automated collection and support: $143 million; 1,971 FTEs;
* Tax reporting compliance, document matching: $78 million; 1,114
* Tax reporting compliance, electronic and correspondence exam: $115
million; 1,585 FTEs;
* Earned income tax credit management and administration: $6 million;
30 FTEs;
Investigations:
* Accounts management taxpayer assurance program: $30 million; 420
FTEs;
Shared services and support:
* Shared support not provided by agency-wide shared services: $1
million; 0 FTEs;
* Statistics of income: $14 million; 215 FTEs;
* Research: $10 million; 67 FTEs;
* Wage and Investment business modernization support: $20 million; 138
FTEs.
Wage and Investment fund center: $2.386 billion; 34,568 FTEs.
Source: GAO analysis of IRS fiscal year 2012 obligations data.
[End of figure]
New Budget Formulation Process Identifies Priorities and Reduces Some
Work, but Guidance is Insufficient:
For fiscal year 2014, IRS implemented a new, pre-selection budget
formulation process to provide senior leadership with the opportunity
to screen, prioritize, and select funding proposals before business
units prepare detailed business cases.[Footnote 13] However, we found
that in some instances the information was incomplete. Previously,
business unit staff and subject matter specialists developed detailed
business cases for each proposed initiative. Business cases include
detailed narrative descriptions, multi-year cost estimates, and
account breakouts. IRS budget officials told us the new process
reduces work substantially for business units, since staff no longer
need to develop extensive information for each proposal; instead, they
only develop full information for proposals approved by senior
leadership.
The new pre-selection process requires business unit staff to prepare
selective, consistent information utilizing templates. (See appendix
III for a sample template.) Templates include high level summary
information on the purpose of the initiative, the amount of additional
funds and FTEs requested, and the estimated impact of the initiative.
Management reviews the templates and identifies a preliminary list of
approved initiatives. Next, approved initiatives are communicated to
business units via a decision document, along with any suggested
changes in scope, such as combining initiatives or changing requested
FTE or dollar levels. After preliminary approval, business unit staffs
prepare detailed business cases for approved initiatives.[Footnote 14]
Figure 5 shows an overview of the new process.
Figure 5: Overview of IRS's Pre-selection Budget Formulation Process
for Fiscal Year 2014:
[Refer to PDF for image: illustration]
Business units prepare pre-selection templates based on corporate
budget guidance, which are approved by business unit head.
Senior leadership reviews pre-selection templates and decides which
initiatives to approve.
A list of approved initiatives is forwarded to business units.
Business units develop detailed business cases for approved
initiatives for incorporation in budget justification request.
Final business cases and budget request submitted for approval by the
Commissioner and IRS Oversight Board.
Sources: GAO analysis of IRS information (information); PhotoDisc and
IRS (image).
[End of figure]
Based on our review of the templates from the taxpayer services and
enforcement organizations, we found that the information included by
business units on their templates varied in terms of detail and scope.
This variation could limit the ability of senior leaders to thoroughly
evaluate proposals. For example, about half of the templates reviewed
did not describe the proposed initiative's expected benefits, and
while almost all templates included a brief description of the
proposed initiative, some entries did not include information on the
purpose of the initiative or the strategies that would be used to
achieve program goals. According to OMB Circular A-94, in order to
evaluate and compare funding initiatives, decision-makers need to be
aware of benefits and costs (tangible and intangible), as well as
strategies needed to achieve program goals.[Footnote 15]
According to IRS budget officials, there were several reasons for
variations among template submissions. In some instances, senior
leadership was very familiar with proposed initiatives and familiar
with the estimated impact; in other instances, business units were
less adept at articulating benefits of the proposed initiative.
Officials also said that senior leadership conducts oral discussions
with the business units to clarify an initiative's benefits.
Template instructions provided to business units may have contributed
to some incomplete pre-selection template submissions. For instance,
the guidance template does not provide an example of qualitative
benefits (appropriate for some initiatives) or proposal strategies
(especially relevant for initiatives that have not previously been
proposed). IRS budget officials acknowledged that improvements could
be made in the pre-selection process guidance, especially since this
was the first year for this new process. Providing more robust
guidance to business units on the information to include in pre-
selection templates could help to ensure that business units more
fully complete these templates.
IRS Identified Potential Savings in Its Base Budget:
The fiscal year 2014 budget request for IRS shows proposed savings and
efficiencies in its base budget in several areas totaling over $217
million as shown in table 2.[Footnote 16] Some of IRS's expected
fiscal year 2014 savings are anticipated to be achieved through
operational changes, such as shifting funds to automate processes and
streamlining or consolidating operations and functions to make them
more cost-effective.
Table 2: Fiscal Year 2014 Projected Base Budget Savings:
Realizing Personnel Savings;
Taxpayer Services: $13.2 million;
Enforcement: $56.6 million;
Operations Support: $7.9 million;
BSM: [Empty];
Total: $77.8 million.
Reducing IT Infrastructure;
Taxpayer Services: [Empty];
Enforcement: [Empty];
Operations Support: $57.5 million;
BSM: [Empty];
Total: $57.5 million.
Capturing Savings from Space Optimization[A];
Taxpayer Services: [Empty];
Enforcement: [Empty];
Operations Support: $39.2 million;
BSM: [Empty];
Total: $39.2 million.
Funding Business Systems Modernization (BSM);
Taxpayer Services: [Empty];
Enforcement: [Empty];
Operations Support: [Empty];
BSM: $30.0 million;
Total: $30.0 million.
Implementing Human Capital Administrative Efficiencies;
Taxpayer Services: [Empty];
Enforcement: [Empty];
Operations Support: $7.9 million;
BSM: [Empty];
Total: $7.9 million.
Achieving e-File Savings;
Taxpayer Services: $5.0 million;
Enforcement: [Empty];
Operations Support: $0.1 million;
BSM: [Empty];
Total: $5.0 million.
Total savings;
Taxpayer Services: $18.2 million;
Enforcement: $56.6 million;
Operations Support: $112.6 million;
BSM: $30.0;
Total: $217.4 million.
Source: Fiscal Year 2014 congressional budget justification for IRS.
Notes: Numbers may not add due to rounding.
[A] Savings are shown as net.
[End of table]
IRS's 2014 fiscal year budget includes the following savings and
efficiencies:
* Realizing Personnel Savings: Personnel savings are mainly the result
of staff attrition and hiring restrictions.
* Reducing IT Infrastructure: Examples of IT infrastructure changes
include providing improved data storage capacity, updating computer
servers to be more efficient, adopting common technology platforms and
a more efficient telecommunications infrastructure, and changing IT
contracting practices. For example, IRS is in the process of
implementing virtual computer servers for data storage. Also, the IRS
is implementing new technologies for sharing computer services across
the agency.
* Capturing Savings from Space Optimization: IRS has reduced (or plans
to reduce) its office inventory, having selected 123 of its 648
offices to be closed, consolidated, or reduced.[Footnote 17] These
rental savings are the result of attrition, hiring restrictions, and
changes in working environments (such as increased telework and
development of workspace standards that decrease individual office
size). Space optimization savings require a one-time investment of
$37.5 million to build out new and consolidated space and relocate
employees, resulting in expected future rent savings of $76.7 million
annually ($39.2 million net).
* Funding BSM: BSM savings represent differences in projected costs of
IT operations from one year to the next, including implementation
costs related to the Current Customer Account Data Engine 2;
Modernized e-File; Core Infrastructure; and Architecture, Integration,
and Management.
* Implementing Human Capital Efficiencies: Administrative efficiency
efforts include the consolidation of employment activities and
modifications to training programs. For example, IRS reduced the
number of Employment Hiring Centers from 9 to 3. IRS also streamlined
processing of requests for personnel-related changes, such as salary
increases, transfers, or leaves of absence. In addition, the
Employment Operations Unit automated its hiring process to enable
electronic completion of pre-hire forms. Some training programs are
being modified from classroom training to webinars, reducing travel
costs and allowing more employees to attend.
* Achieving e-File Savings: These savings result from labor reductions
related to increased use of electronic filing of tax returns and
corresponding decrease in paper returns.
IRS Developed New Revenue Protection and Revenue Enhancement ROI
Projections:
In its fiscal year 2014 congressional justification, IRS included
projected ROI for 10 enforcement initiatives, including two
initiatives that used new approaches in estimating potential ROI:
revenue protection and revenue enhancement. According to agency budget
officials, IRS developed the new ROI methodologies because it did not
have enough historical data on these initiatives to use the same
methodology used for other initiatives. Since fiscal year 2008, IRS
has included ROI projections for new revenue-generating enforcement
initiatives in its congressional justification.[Footnote 18] IRS has
generally calculated ROI projections for revenue generating
initiatives based on the amount of additional tax collected. For each
initiative, IRS calculated an estimate of the potential revenue
collected by requested FTEs using 10 years of historical data. Because
10 years of historical data were not available for the revenue
protection and revenue enhancement initiatives, IRS developed new
methodologies.
For example, the fiscal year 2014 budget for IRS requests $101.1
million for an "Improve the Identification and Prevention of Refund
Fraud and Identity Theft" initiative. According to IRS, if funded, the
initiative would protect revenue because these activities would
identify fraudulent returns related to identity theft and resolve
cases prior to issuing a refund. To estimate the amount of projected
revenue that would be protected, IRS determined the dollar amount of
erroneous refunds detected per FTE from the beginning of the 2012 tax
filing season through August of that year. As shown in figure 6, IRS
estimated the ROI for this initiative to be 6.2 to 1 in fiscal year
2014, rising to 14.4 to 1 in fiscal year 2016.
Figure 6: Projected ROI for Improve Identification and Prevention of
Refund Fraud and Identity Theft Initiative:
[Refer to PDF for image: combined vertical bar and line graph]
Fiscal year: 2014:
Cost: $101.1 million;
Revenue: $631 million;
Projected ROI: $6.2 million.
Fiscal year: 2014:
Cost: $88.3 million;
Revenue: $946 million;
Projected ROI: $10.7 million.
Fiscal year: 2014:
Cost: $87.7 million;
Revenue: $1,261 billion;
Projected ROI: $14.4 million.
Source: GAO analysis of fiscal year 2014 congressional budget
justification for IRS.
[End of figure]
The fiscal year 2014 budget for IRS also requests $51.7 million for a
"Leverage Data to Improve Case Selection" initiative. According to
IRS, if funded, this initiative would enhance revenue by improving
technology that would enable IRS to improve case selection, issue
identification, and enforcement case treatment. This technology would
also allow IRS to adapt quickly to changing taxpayer behavior and tax
code misuse. To estimate the additional amount of projected revenue
that would be generated by this initiative, IRS studied the impact of
using certain electronically filed data in a new way to examine
selected tax returns and found that it could help classifiers detect
more noncompliance.[Footnote 19] Based on the study's findings, IRS
estimated that using certain electronically filed data would increase
examination assessments for taxpayers at all income levels, and used
that estimate to calculate the amount of additional revenue that could
be collected as a result of the "Leverage Data to Improve Case
Selection" initiative. As shown in figure 7, IRS estimated an initial
cost of $52 million in fiscal year 2014 followed by an estimated ROI
of 1.3 to 1 in fiscal year 2015 and 1.5 to 1 in fiscal year 2016.
[Footnote 20]
Figure 7: Projected ROI for Leverage Data to Improve Case Selection
Initiative:
[Refer to PDF for image: combined vertical bar and line graph]
Fiscal year: 2014:
Cost: $51.7 million;
Revenue: $0;
Projected ROI: $0.
Fiscal year: 2014:
Cost: $50.2 million;
Revenue: $63.2 million;
Projected ROI: $1.3 million.
Fiscal year: 2014:
Cost: $50.0 million;
Revenue: $75.7 million;
Projected ROI: $1.5 million.
Source: GAO analysis of fiscal year 2014 congressional budget
justification for IRS.
[End of figure]
IRS Significantly Improved Its PPACA Cost Estimate, but Did Not
Publicly Report Investment Information for the Fiscal Year 2014 Budget
Request:
Updated PPACA Cost Estimate Shows Significant Progress, But a Few
Areas for Improvement Remain:
In December 2012, IRS updated the PPACA cost estimate as part of its
on-going practice to refine the cost estimate and address our prior
recommendation.[Footnote 21] The updated cost estimate reflects best
practices to a much greater extent, as shown in table 3. Unlike
previous versions, the updated cost estimate shows significant
progress, as it reflects the full-cycle cost of the program, which
will total $1.89 billion from fiscal year 2010 through 2026. With this
information, budget decision makers can see the amount IRS plans to
spend on the multi-year PPACA effort in a particular year, as well as
an estimate of costs that remain to be funded in future years.
According to the GAO Cost Guide, a reliable cost estimate must be
comprehensive, well documented, accurate, and credible.[Footnote 22]
(See appendix IV for our full assessment of the updated PPACA cost
estimate.) In June 2012, we reported that IRS's cost estimate for
PPACA did not fully meet best practices for a reliable cost estimate.
[Footnote 23]
When enacted, PPACA contained 47 tax-related provisions that IRS is
responsible for implementing with effective dates through
2018.[Footnote 24] Meeting these statutory requirements has required a
significant IT investment in new data models, databases, and IT
systems and operations support. IRS's PPACA cost estimate is important
in determining and communicating a realistic view of a program's
likely cost and schedule outcomes that can be used to plan the work
necessary to develop, produce, install, and support the program. The
cost estimate is also integral to establishing and defending budget
requests: it provides context for the $440 million requested for IRS
to address PPACA requirements in fiscal year 2014.
Table 3: Overall Assessment of PPACA Cost Estimate Alignment with Best
Practices:
Best practice: Comprehensive;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Substantially meets.
Best practice: Well documented;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Substantially meets.
Best practice: Accurate;
October 2010 cost estimate: Partially meets; Updated December 2012
cost estimate: Partially meets.
Best practice: Credible
October 2010 cost estimate: Minimally meets; Updated December 2012
cost estimate: Partially meets.
Key:
Substantially meets: IRS provided evidence that satisfies a large
portion of the criterion.
Partially meets: IRS provided evidence that satisfies about half of
the criterion
Minimally meets: IRS provided evidence that satisfies a small portion
of the criterion.
Source: GAO analysis of IRS documentation.
[End of table]
A few areas remain where IRS could continue to improve the reliability
of the cost estimate to better meet best practices outlined in the GAO
Cost Guide. We found that the cost estimate only partially met best
practices for accuracy and credibility. Specifically, we identified
three deficiencies in the accuracy of the cost estimate. First, the
cost estimate was not fully adjusted for inflation. IRS adjusted
future costs for inflation, and documented inflation rates, but
reported past costs in current year dollars. Because sunk costs were
not adjusted for inflation, their contribution to the cost estimate is
higher than it should be. In August 2013, the IRS Chief Financial
Officer told us that, as a result of this finding, IRS has already
revised the next update to the PPACA cost estimate to adjust sunk
costs for inflation. Second, IRS included actual sunk costs in the
estimate, but it did not use earned value management--a process for
capturing actual costs and comparing them to estimated costs. Earned
value management would enable IRS to continuously update the estimate
to reflect actual costs. Third, the estimate shows how it varies from
a previous estimate, but it does not explain factors behind the
variance. If the reasons for cost variances are not captured,
estimators cannot identify lessons learned that would improve future
estimates.
We also identified three deficiencies in the credibility of the cost
estimate. First, IRS conducted a sensitivity analysis on two cost
drivers (a sensitivity analysis examines the effects on changing
assumptions and estimating procedures to highlight elements that are
cost-sensitive). However, it is not clear how the two cost drivers
were selected for analysis or whether IRS identified the cost elements
that were the most sensitive to change. Second, IRS developed multiple
risk management plans and conducted a risk and uncertainty analysis,
but it is unclear how the risk management plans were applied to
address the risks identified in the cost estimate. In addition, IRS
incorrectly treated the total funding risk for the entire program as
equal to the sum of the risks of individual elements. A proper risk
and uncertainty analysis is necessary to correctly assess the
variability in the cost estimate due to program risks. Third, IRS did
not obtain a second cost estimate. The GAO Cost Guide specifies that
producing two cost estimates that are independent of one another is a
best practice because the second cost estimate can validate the first
and provide an unbiased test of whether the original cost estimate is
reasonable.
We discussed each of these deficiencies with IRS officials, who stated
they gained a better understanding of the criteria in the GAO Cost
Guide based on our meeting. Because it provides a sound basis for
informed investment decision making, realistic budget formulation, and
accountability for results, developing a reliable cost estimate that
meets best practices is critical to PPACA's success.
IRS Did Not Report PPACA Investment Information on the OMB Dashboard
Website:
Although the IT systems used to implement PPACA (which IRS refers to
as the ACA IT investment) meet the Department of Treasury's (Treasury)
definition of a major investment,[Footnote 25] IRS reported the
investment as a non-major investment in fiscal year 2014. According to
agency officials, IRS did not have time to prepare the information
that is typically reported for major investments in the President's
fiscal year 2014 budget request. Unlike major investments, non-major
investments are not included for public reporting on the OMB IT
Dashboard[Footnote 26] and are also not required to be included in the
"Capital Asset Summary," referred to as an Exhibit 300.[Footnote 27]
In prior years, IRS's portion of the ACA IT investment was included
with related investments that were managed and reported by the
Department of Health and Human Services (HHS). HHS reported ACA IT
investment information on the Dashboard. In January 2013, at the end
of the fiscal year 2014 budget formulation cycle, IRS's portion of the
ACA IT investment was split from HHS's portion and IRS assumed
responsibility for reporting on its portion. The Clinger-Cohen Act of
1996 requires OMB to establish processes to analyze, track, and
evaluate the risks and results of major capital investments in
information systems and report to Congress on the net program
performance benefits achieved as a result of these investments. In
addition, OMB's Capital Programming Guide defines major acquisitions
to include capital assets that require special management attention
because of high costs, high risk, or a significant role in the
administration of agency programs. According to the Treasury budget
director and IRS officials, the ACA IT investment is expected to be
reported as a major investment in the fiscal year 2015 budget request.
IRS and Treasury officials also told us they plan to include an
Exhibit 300 and report ACA IT information on the OMB Dashboard.
Not reporting information on IRS's ACA IT investment on the Dashboard
or in an Exhibit 300 makes it more difficult to monitor and limits
transparency. As a result, information about the implementation of
PPAA--such as the individual projects that comprise the investment,
evaluation history, current Exhibit 300 and cost and schedule
variances--is not as readily available to Congress and the general
public.
IRS Expanded Information Reported on Its Major IT Investments in the
Fiscal Year 2014 Budget Justification, but Additional Information
Would Be Useful:
In the fiscal year 2014 budget justification, IRS included new, useful
information on its major IT investments that was not included in prior
budget justifications, such as life-cycle costs,[Footnote 28]
projected useful life of the current asset, anticipated benefits, and
how performance will be measured. This additional information is a
significant enhancement to information provided in prior budget
justifications, and provides decision makers with more context on
IRS's portfolio of IT investments. However, IRS does not provide
information on IT investments in a consolidated format. IT is a
significant portion--about 20 percent--of the total IRS budget request
for fiscal year 2014. It includes approximately $2.6 billion to fund
18 major IT investments and 131 non-major investments. (See appendix V
for a summary of the major IT investments.)
In addition to the budget justification, information on major IT
investments is also presented in other budget related documents,
including the Exhibit 300. Exhibit 300s are developed by agencies and
reviewed by OMB for each major IT investment. OMB sets forth
requirements for the Exhibit 300 in its Circular A-11. Exhibit 300s
are publicly available, with some sensitive information redacted on
the Dashboard.[Footnote 29] In some instances, the type of information
reported in the budget justification is also reported in the Exhibit
300, such as the projected useful life of the current asset. However,
certain other information (such as the start date, funds obligated
through the prior fiscal year, and the number of FTEs represented by
current costs) is only available in the Exhibit 300. Additional
information (such as percent of life-cycle costs obligated through the
prior fiscal year) is not available in either report, but can be
calculated with information contained in the Exhibit 300 and budget
justification. See table 4 for a general description of the type of
information included in the budget justification and Exhibit 300.
Table 4: Summary of IT Investment Data Presented in the Fiscal Year
2014 Congressional Budget Justification for IRS and Exhibit 300:
Source: Fiscal year 2014 congressional justification for IRS;
Section name: Capital investments;
Description: Identifies and describes the investment, including the
projected useful life (e.g., end date) and the investment phase (e.g.,
development, modernization and enhancement (DME) or operations and
maintenance)[A];
Description: Provides information on the funding source (e.g.,
appropriation account), obligations data from prior years, request for
single budget year, and funding type for current year;
Description: Describes current cost and schedule performance and the
anticipated benefit of the investment.
Source: Fiscal year 2014 Exhibit 300;
Section name: General information;
Description: Provides the investment name and Unique Investment
Identifier, a numeric code applied to an investment that allows
identification and tracking across multiple fiscal years of an
agency's investment portfolio;
Section name: Investment detail;
Description: Describes the investment's purpose, goals, and current or
anticipated benefits; currently projected return on investment;
progress and accomplishments in prior years;
Section name: Life-cycle costs;
Description: Provides an overview of the costs for planning,
development, modernization and enhancement, and operations and
maintenance; full-time equivalents for the previous, current and
future fiscal years; and the year the investment begins and ends;
Section name: Acquisition/contract strategy;
Description: Provides a list of all prime contracts or task orders for
awarded or open solicitations;
Section name: Project plan and execution data;
Description: Describes all projects, activities, and/or operations
associated with the investment scheduled to commence or continue in
the current or future fiscal year;
Section name: Operational data;
Description: Identifies metrics associated with the investment, actual
results, and risk assessments;
Source: Fiscal year 2014 Congressional budget justification for IRS
and Office of Management and Budget Guidance on Exhibits 53 and 300 -
Information Technology and E-Government.
Notes:
[A] DME is a term used by OMB to describe the program cost for new
investments, changes or modifications to existing systems to improve
capability or performance, changes mandated by the Congress or agency
leadership, personnel costs for investment management, and direct
support. For major IT investments, this amount should equal the sum of
amounts reported for planning and acquisition plus the associated FTE
costs reported in the Exhibit 300.
[End of table]
Because different information exists in different documents, decision
makers must access multiple public documents to gain a full
understanding of IRS's IT priorities. For example, if a decision maker
was interested in the Modernized e-File (MeF) IT investment, the
fiscal year 2014 budget justification would show that the projected
useful life of the asset extends to 2019, however, to know the start
date of the MeF investment--2001--the decision maker would also need
to access the Exhibit 300. Likewise, the decision maker would see that
the fiscal year 2014 budget justification shows the estimated life-
cycle costs for MeF to be $575 million, however, to know how much has
been obligated for the investment from the start date through fiscal
year 2012--$304 million--the decision maker would have to access the
Exhibit 300 and calculate the amount of funding obligated across prior
fiscal years.
Consolidating key budget and performance information on major IT
investments in one budget document (such as the congressional
justification) would ensure decision makers have comprehensive, easy
to understand information on major IT investments. In particular,
consolidating information for complementary data elements (such as
start date and projected useful life of the current asset, and amount
of funding obligated through prior fiscal years and life-cycle costs)
would provide useful context to understand IRS's progress in
implementing long-term IT investments. IRS officials said they can
consolidate this information for ease of review.
GAO's Standards for Internal Control in the Federal Government states
that information should be communicated in a format that enables
management and others to carry out their oversight
responsibilities.[Footnote 30] Further, the GPRA Modernization Act of
2010--which can serve as a guide to leading practices for planning at
lower levels within federal agencies--requires that agencies consult
with relevant committees when developing or making adjustments to
their strategic plans and agency priority goals. Consulting with
relevant committees regarding IT investments would provide IRS with an
opportunity to share performance information and confirm that various
committees are getting the types of performance information needed.
Congressional staffs have requested comprehensive, easy to understand
information on IRS's IT investments: providing it in a comprehensive,
consolidated format could provide them with better information to
guide decisions. Congress directed IRS to include a summary of cost
and schedule performance information for its major IT investments in
its budget justification for fiscal year 2013; in addition, starting
in March 2012, IRS was required to submit a report after every quarter
with specific information on IRS's selected major IT investments,
including a "plain English" explanation of the cost and schedule for
the previous three months and the cost and schedule performance for
the upcoming three months.[Footnote 31] IRS has been submitting these
reports and briefing the Appropriations Committees and other
congressional stakeholders. Despite the increased information in the
budget justification and the new quarterly report, key budget and
performance information on all of IRS's major IT investments remains
in various budget documents. Until such data is consolidated, it is
less accessible to congressional stakeholders.
IRS Implemented Six of Our Nine Prior Recommendations to Improve the
Budget Presentation and Aid Decision Making:
Since June 2012, IRS implemented six recommendations made in our prior
reviews of its budget justification documents. Three of the
implemented recommendations resulted in additional information in the
budget request, such as actual ROI and linking funding requests for
new initiatives to strategic goals and objectives. Enhanced
information in the budget request can aid decision making and provide
context to Congress regarding how current operations and requests for
new funding support IRS priorities. Table 5 summarizes the
recommendations implemented by IRS.
Table 5: Prior GAO Recommendations Implemented by IRS:
Report: [hyperlink, http://www.gao.gov/products/GAO-09-754[A];
Recommendation: Compare actual ROI data with projections;
We recommend that the Commissioner of Internal Revenue take steps to
develop ROIs for IRS's enforcement programs using actual revenue and
full cost data and to compare the actual ROIs to the projected ROIs
included in the budget requests;
Action taken: IRS calculated actual ROIs for three major enforcement
programs--Exams, Collections, and Automated Underreporter--and
reported the data in the fiscal year 2014 congressional justification;
Benefit: By including data on actual ROIs there is a basis for
assessing the revenue and cost impact of program-level changes.
Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R;
Recommendation: Provide additional information about program
activities. To enhance the transparency of IRS's budget request, the
Commissioner of Internal Revenue should provide additional
information, which could be qualitative if necessary to avoid losing
existing reprogramming flexibility, about the program activities in
the budget justification to better indicate IRS's priorities;
Action taken: IRS has taken steps, such as setting up certain codes in
its financial management system to track obligations, which allows it
to more readily compile obligations data for many of its
organizational entities and other efforts of interest--including
program activities--when requested;
Benefit: Information on prior year obligations can provide context for
IRS's new resource requests and facilitate decision making.
Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R;
Recommendation: Link budget request to strategic documents;
To enhance the transparency of IRS's budget request, the Commissioner
of Internal Revenue should make explicit linkages between initiatives
and proposals in the budget and strategic documents;
Action taken: In the fiscal year 2014 congressional justification IRS
included a new table that identifies how budget initiatives are linked
to Department of Treasury priority goals and strategic goals, and IRS
strategic goals;
Benefit: By linking the budget request to strategic documents,
Congress and other stakeholders are better able to understand IRS's
priorities to improve service and enforcement.
Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R;
Recommendation: Describe noteworthy changes in performance goals;
In the budget justification, explain noteworthy changes in performance
goals that reflect changes from previous performance and describe the
impact on funding;
Action taken: IRS included some linkages between performance goals and
funding, identifying some instances where funding impacted the level
of performance, such as telephone level of service. IRS budget
officials noted they plan to continue providing this type of
information in future years;
Benefit: Clear linkages between performance goals and funding can help
determine how funded activities contribute to operational goals and to
specific measures. These linkages can also illustrate how targets
align with funding and how efficiently resources are used.
Report: [hyperlink, http://www.gao.gov/products/GAO-11-547;
Recommendation: Systematically identify savings and efficiencies;
To improve the usefulness of the budget request for IRS, the
Commissioner of Internal Revenue should further expand efforts to
systematically identify savings and efficiencies as part of its budget
development process on a periodic, but not necessarily annual, basis;
Action taken: In fiscal years 2013 and 2014 budget formulation
guidance, the IRS Corporate Budget Office instructed business units to
identify specific and achievable savings and efficiencies, estimate
cost savings, and describe associated assumptions. In addition, IRS
established task forces and working groups to restructure and
streamline operations, and solicited employees for cost-reduction
suggestions;
Benefit: By developing a more systematic process, IRS is better
positioned to identify savings and efficiencies.
Report: [hyperlink, http://www.gao.gov/products/GAO-12-603;
Recommendation: Update the PPACA cost estimate. To continue to improve
information on program costs and results that could aid in resource
decision making, the Commissioner of Internal Revenue should ensure
that an updated PPACA cost estimate is completed by September 2012 in
accordance with best practices in the GAO Cost Guide;
Action taken: IRS updated the PPACA cost estimate which now meets best
practices to a greater extent. Specifically, the cost estimate
substantially meets two, and partially meets two, of the four
characteristics of a reliable cost estimate. For example, the cost
estimate now includes full life-cycle costs;
Benefit: By fully accounting for life-cycle costs, management has
better information to plan program resource requirements and make wise
decisions.
Source: GAO analysis of prior GAO reports on IRS's budget request.
Notes:
[A] We previously reported this recommendation as partially
implemented in [hyperlink, http://www.gao.gov/products/GAO-12-603].
[End of table]
As shown in table 6, IRS officials agreed with two of the three budget
related recommendations that remain open. IRS initially disagreed with
our recommendation to modify its funding request for new hires.
However, in August 2013, IRS Corporate Budget officials told us that
IRS is considering options to implement the recommendation, including
possibly describing in the operating plan how it plans to use
available funds not needed for new hires in the first year.
Table 6: Budget-Related Recommendations to IRS That Remain Open:
Report: [hyperlink, http://www.gao.gov/products/GAO-12-603;
Open recommendations: Conduct cost-effectiveness analyses;
Ensure cost-effectiveness analyses are conducted for future
significant investments when there are alternative approaches for
achieving a given benefit, such as for any new significant PPACA
projects;
Benefit: Without cost effectiveness analyses, budget decision makers
do not have information to compare alternatives and it may be
difficult to determine the best use of resources;
IRS agreed with recommendation: Yes. IRS officials are taking steps to
implement this recommendation.
Report: [hyperlink, http://www.gao.gov/products/GAO-12-603;
Open recommendations: Develop a quantitative measure of scope;
Develop a quantitative measure of scope, at a minimum for its major IT
investments, in order to have complete information on the performance
of these investments;
Benefit: Without a quantitative measure of scope, IRS cannot ensure
that it has a method for monitoring and comparing actual performance
to planned results. Such a measure is a good management practice and
provides Congress with information on IRS's performance in delivering
IT systems;
IRS agreed with recommendation: Yes. IRS officials told us they have
not taken any action to implement the recommendation.
Report: [hyperlink, http://www.gao.gov/products/GAO-12-603;
Open recommendations: Modify funding request for new hires;
Prepare funding requests for new staff based on estimated hiring dates;
Benefit: By assuming an October 1 hire date, IRS's budgeting for new
staff overstates its labor costs and could result in funding being
used for other purposes;
IRS agreed with recommendation: No. However, as of August 2013,
officials told us they are considering options to implement the
recommendation.
Source: GAO analysis of prior GAO reports on IRS's budget request.
[End of table]
Conclusions:
IRS has taken important steps to include new and useful information in
its budget justification to aid Congress and other stakeholders,
including new information on actual ROI and enhanced information on
major IT investments. In addition, IRS made significant improvements
to the PPACA cost estimate, which is integral to accurately informing
budget decision makers of the anticipated long-term costs for both
implementation and administration of the new health care program.
Furthermore, IRS's new pre-selection process for determining which
initiatives to request funding for was reported by officials to be a
more efficient method for commencing budget formulation, although
enhanced guidance could make it more effective. We also identified
some other actions that could improve the budget request and aid
Congress in decision making, including (1) improving the accuracy and
credibility of the PPACA cost estimate in future updates because it
provides the basis for informed investment decision making, realistic
budget formulation, and accountability for results, (2) ensuring the
ACA IT investment is publicly reported to increase transparency and
(3) reporting consolidated information on major IT investments to make
the information more accessible.
Recommendations for Executive Action:
To enhance the budget process and to improve transparency, we
recommend the Acting Commissioner of Internal Revenue take the
following four actions:
* Improve guidance given to business units for the pre-selection
budget formulation process, emphasizing the importance of information
on the estimated impact--qualitative or quantitative--of proposed
budget initiatives.
* Improve the accuracy and credibility of future updates to the PPACA
cost estimate by taking the following actions to more closely follow
best practices outlined in the GAO Cost Guide:
- Use earned value management to capture actual costs and use them as
a basis for future updates.
- Explain why variances occurred between the current estimate and
previous estimates.
- Document how cost drivers are selected for future sensitivity
analyses.
- Conduct future risk and uncertainty analyses consistent with best
practices, and develop and document plans to address risks.
- Validate the original cost estimate by preparing a second,
independent cost estimate.
* Publicly report the ACA IT investment as a major investment on the
OMB IT Dashboard and the fiscal year 2015 budget request, including
standard cost, schedule, and performance information.
* Report key data on major IT investments in one consolidated
document, such as the congressional justification, in consultation
with congressional stakeholders.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Acting Commissioner of the
IRS for his review and comment. We received an email on September 18,
2013 from the Chief Financial Officer, which included an attachment
that provided the agency's comments to our recommendations. This
attachment is reprinted in appendix VI. In response to our draft
report, the Chief Financial Officer stated that IRS agreed with three
of our four recommendations and identified actions planned and taken
to address them. For example, IRS agreed to include additional data on
its major IT investments in the congressional justification, such as
actual obligations for the investment to date. IRS agreed with the
majority of the actions associated with our fourth recommendation on
improving the accuracy and credibility of future updates of the PPACA
cost estimate. IRS disagreed with two actions contained in our fourth
recommendation. Specifically,
* IRS disagreed with our recommended action to use earned value
management, a process that would enable IRS to continuously update the
cost estimate to reflect actual costs. IRS stated that earned value
management is not part of its current program management processes
because the cost and burden to use earned value management outweigh
the value added. We disagree with IRS's view as to the benefits of
earned value management. GAO has found that programs that establish
good earned value management systems realize better project management
decision making and fewer cost and schedule overruns. While there is
an upfront investment to establish the earned value management system,
there are long-term benefits that go beyond the individual project,
such as fostering accountability, improving insight into program
performance, and providing objective information for managing the
program. Further, the OMB Capital Programming Guide states that earned
value management is a critical component of risk management for major
investments.
* IRS also disagreed with our recommended action to validate the PPACA
cost estimate by preparing a second, independent cost estimate. IRS
stated that the cost and burden of having an external organization
produce a second, independent cost estimate of the same scope would
outweigh the value added. In addition, IRS stated that an external
organization would lack the knowledge necessary to produce a
reasonable estimate without relying heavily on the IRS group that
produced the first estimate. We disagree with IRS's view. As reflected
in the GAO Cost Guide, GAO has found that producing a second,
independent cost estimate is considered one of the best and most
reliable methods for validating a cost estimate. Without a second,
independent cost estimate, decision makers lack insight into a
program's potential costs and may lack confidence that the estimate is
reasonable and costs described in the first estimate can be achieved.
While preparing a second cost estimate that is independent of the
first cost estimate requires additional resources, it is generally
based on the same detailed technical and procurement information.
Furthermore, an independent cost estimate does not need to be
conducted by an external organization, but the estimation team should
be outside the acquisition chain and have nothing at stake with regard
to program outcome or funding decisions. The major benefit of a
second, independent cost estimate is that it provides an objective and
unbiased assessment of whether the original estimate can be achieved;
reducing the risk that the program will proceed underfunded or costs
will exceed its value.
We plan to send copies of this report to the Chairman and Ranking
Members of other Senate and House committees and subcommittees that
have appropriation, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Acting Commissioner of Internal
Revenue, the Secretary of the Treasury, and the Chairman of the IRS
Oversight Board. Copies are also available at no charge on the GAO web
site at [hyperlink, http://www.gao.gov].
If you or your staffs have further questions or wish to discuss the
material in this report further, please contact me at (202) 512-9110
or mctiguej@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix VII.
Signed by:
James R. McTigue, Jr.
Director, Tax Issues:
Strategic Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
We were asked to review the President's fiscal year 2014 budget
request for the Internal Revenue Service (IRS). The objectives of this
report were to (1) describe IRS's capacity to report fiscal year 2012
obligations and full-time equivalent (FTE) data for program
activities, organizational entities, and other efforts of interest;
(2) assess IRS's process and the type of information used to
prioritize and select new program initiatives; (3) describe proposed
base budget savings; (4) describe IRS's new projected return on
investment (ROI) methodologies; (5) evaluate steps IRS took to improve
the cost estimate for the Patient Protection and Affordable Care Act
(PPACA) in accordance with GAO's Cost Estimating and Assessment
Guide[Footnote 32] and determine the extent to which IRS is
transparently reporting on the Affordable Care Act (ACA) information
technology (IT) investment; (6) summarize IRS's major IT investments
and assess the type of information available in the congressional
justification; and (7) describe IRS's progress in implementing our
prior budget-related recommendations.
To describe IRS's capacity to report fiscal year 2012 obligations and
FTE data, we reviewed documentation related to IRS budget formulation
and budget execution, including IRS's Financial Management Codes
Handbook, IRS's organizational chart, and its fiscal year 2014
congressional budget justification. We also interviewed knowledgeable
officials in IRS's Corporate Budget Office. We selected eight program
activities, organizational entities, and efforts of interest for
analysis: (1) Appeals, (2) Identity Theft, (3) International Exam and
Collections, (4) Merchant Card and Basis Matching and the related
Information Reporting and Document Matching (IRDM) IT system, (5)
Offshore Voluntary Disclosure Program, (6) Online Services, (7)
Telephone and Correspondence Services, and (8) Wage and Investment. We
selected this list based on the following criteria: whether it was
included in the proposed fiscal year 2014 budget initiatives, whether
it was the topic of prior GAO work, and whether the selected list (as
a whole) spans most of IRS's appropriation accounts and encompasses a
range of methods by which the data can be obtained from IRS's
financial management system. To determine IRS's capacity to compile
fiscal year 2012 obligations data for these eight items, we
interviewed knowledgeable officials in IRS's Corporate Budget Office.
From the eight selected program activities, organizational entities,
and other efforts of interest, we selected two illustrative examples
to report fiscal year 2012 obligations data and to show how IRS's
budget formulation and budget execution structures interact: Appeals,
and Wage and Investment. We selected these two examples largely to
demonstrate the differences in structures. While they are both fund
centers in IRS's budget execution structure that manage and distribute
funds, Appeals is also a program activity in IRS's budget formulation
structure and shows a relatively simple relationship between these
structures. In contrast, Wage and Investment is a complex fund center
that receives funding from many segments of IRS's budget formulation
structure. We assessed the reliability of IRS's fiscal year 2012
obligations data by reviewing relevant IRS documents, including the
Financial Management Codes Handbook, as well as prior work we
conducted that assesses IRS's financial statements.[Footnote 33] We
believe that the data are sufficiently reliable for our purposes. We
identified some limitations, but they do not affect our illustrative
use of the data and are discussed in our report.
To assess IRS's process and the type of information used to prioritize
and select new program initiatives, we reviewed IRS documents related
to its pre-selection budget formulation process for fiscal year 2014.
Documents included guidance from the IRS Corporate Budget Office and
pre-selection templates submitted for review by the taxpayer services
and enforcement business units to senior leadership between November
2011 and May 2012. We analyzed these submissions for completeness
against criteria for budget formulation outlined in OMB Circulars A-
94.[Footnote 34] We also interviewed IRS officials familiar with the
pre-selection process.
To describe proposed base budget savings, we reviewed the fiscal year
2014 congressional budget justification for IRS. To determine the
processes followed to identify savings and efficiencies, we also
interviewed IRS officials in the IRS Corporate Budget Office and from
the Large Business and International division. We analyzed documents
obtained from IRS on its proposed fiscal year 2014 budget savings and
efficiencies, such as human capital, space optimization, and IT
infrastructure summaries.
To describe IRS's new projected ROI methodologies (of revenue
protection and revenue enhancement) included in the fiscal year 2014
budget request, we discussed the difference between the new
methodologies and IRS's other projected ROI calculations with
officials in IRS's Office of Compliance Analytics and Corporate Budget
Office. We also reviewed a related briefing developed by the Office of
Compliance Analytics that summarizes the extent to which the use of
non-transcribed electronic data impacts the classification of cases.
[Footnote 35]
To evaluate steps IRS took to improve the PPACA cost estimate, we
compared IRS's updated PPACA cost estimate, completed in December
2012, with the characteristics of a high-quality cost estimate,
identified in the GAO Cost Estimating and Assessment Guide (Cost
Guide).[Footnote 36] Our Cost Guide identifies four characteristics of
a high quality cost estimate. The cost estimate should be (1)
comprehensive, (2) well documented, (3) accurate, and (4) credible. We
calculated the assessment rating of each criterion within the four
characteristics by assigning each an individual assessment rating as
follows: does not meet = 1, minimally meets = 2, partially meets = 3,
substantially meets = 4, and meets = 5. We then averaged the
individual practice scores to determine the overall rating. We shared
our preliminary analysis of the updated PPACA cost estimate with
program officials. When warranted, we updated our analyses based on
the agency's response and additional documentation provided to us.
To assess the transparency of IRS's reporting on the ACA IT
investment, we reviewed information reported by the Department of
Treasury (Treasury) on its capital investments, including the Office
of Management and Budget (OMB) IT Dashboard. We also interviewed IRS
and Treasury officials to obtain their views on PPACA management and
reporting. To perform our assessment, we used relevant criteria on
reporting capital investment information, including the Clinger-Cohen
Act of 1996 and the OMB Capital Programming Guide.[Footnote 37]
To summarize IRS's major IT investments (defined by Treasury as
investments costing $10 million in either current year or budget year,
or $50 million over the 5-year period extending from the prior year
through the budget year +2) and to assess the type of information
available in the congressional justification, we reviewed fiscal year
2013 and 2014 congressional budget justifications, Exhibit 300s--
capital asset summaries--prepared by IRS for major IT investments, as
well as IRS and OMB guidance on preparing those documents, such as the
Office of Management and Budget Guidance on Exhibits 53 and 300--
Information Technology and E-Government. We identified the type of
information that is available across budget documents, in particular
key information such as cost to date, full time equivalents, life-
cycle costs, start date and end date.
To describe IRS's progress in implementing our prior budget-related
recommendations, we obtained information from various IRS officials
and reviewed relevant documentation, including the fiscal year 2014
congressional budget justification and IRS's Joint Audit Management
Enterprise System (JAMES) reports, which track IRS actions taken to
implement GAO recommendations. We then determined which
recommendations were implemented.
We conducted our work in Washington, D.C., where key IRS officials
involved with the budget and IT systems are located.
We conducted this performance audit from October 2012 to September
2013 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Non-Interactive Version of Figure 1: IRS's Budget
Formulation Structure:
Budget activity: Pre-filing taxpayer assistance and education;
Program activities:
* Pre-filing services management;
* Taxpayer communication and education;
* Media and publications;
* Taxpayer advocacy;
* Account management and assistance, field assistance;
* Taxpayer advocate case processing;
* Wage and investment headquarters management and administration;
* National distribution center.
Budget activity: Filing and account services;
Program activities:
* Filing and account services management;
* Submission processing;
* Account management and assistance, electronic and correspondence
assistance;
* Electronic products and services support;
* Electronic tax administration;
* Pre-refund;
* Health insurance tax credit administration;
* Joint operations center;
* Files most efficient organization;
* Emergency response funds.
Budget activity: Investigations;
Program activities:
* General management and administration;
* Criminal investigations;
* Criminal tax legal support;
* International investigations.
Budget activity: Exam and collections;
Program activities:
* Compliance services management;
* Payment compliance, correspondence collection;
* Automated collection and support;
* Payment compliance, field collection;
* Tax reporting compliance, document matching;
* Tax reporting compliance, electronic and correspondence exam;
* Tax reporting compliance, field exam;
* Fraud and Bank Secrecy Act;
* Appeals;
* Litigation;
* Specialty programs, exams;
* International collection;
* International exams;
* Unit general management and administration;
* Earned income tax credit management and administration;
* Accounts management taxpayer assurance program;
* Whistleblower;
* Communications and liaison.
Budget activity: Regulatory;
Program activities:
* Tax law interpretation and published guidance;
* General legal services;
* Rulings and agreements;
* International regulatory legal support;
* Return preparer strategy;
* Office of professional responsibility;
* Emergency response funds.
Budget activity: Infrastructure;
Program activities:
* Building delegation;
* Rent;
* Space and housing, non-information technology equipment;
* Security.
Budget activity: Shared services and support;
Program activities:
* National headquarters management and administration;
* Real estate and facilities management;
* Procurement;
* Equity, diversity, and inclusion field services;
* Communications and liaison;
* Employee support services;
* Treasury complaint centers;
* Shared support not provided by agency-wide shared services;
* Printing and postage, media and publications;
* Statistics of income;
* Research;
* Security administration and management;
* Wage and investment business modernization support;
* Benefit payments;
* Shared services.
Budget activity: Information services;
Program activities:
* Security services;
* Tier B;
* Management services;
* National headquarters information technology management;
* Affordable Care Act program management office;
* Information technology executive oversight;
* Application development;
* Enterprise operations;
* Enterprise network;
* Enterprise services;
* User and network services;
* Strategy and planning;
* Information technology security certification and accreditation;
* Disaster recovery;
* Information technology security training;
* Information technology homeland security Presidential Directive 12;
* Information technology infrastructure;
* Treasury working capital fund;
* Integrated document solutions enterprise;
* Emergency response funds.
Budget activity: Information technology investments;
Program activities:
* Business systems modernization management;
* Tier A;
* Customer account data engine II;
* Move toward more timely service and enforcement;
* Integrated financial systems;
* Custodial accounting project;
* E-Services;
* Filing and payment compliance;
* Modernized e-file;
* Customer account data engine;
* Infrastructure;
* Program level initiatives;
* Management reserve;
* Accounts management services.
Source: GAO analysis of IRS documents.
Note: The number of program activities varies from one fiscal year to
the next as IRS adjusts its budget formulation structure to address
emerging priorities. Program activities are described in detail in the
fiscal year 2014 congressional budget justification for IRS.
[End of table]
[End of section]
Appendix III: Figure 8: Pre-selection Budget Formulation Process--
Sample Template:
Figure: Rough Order of Magnitude Template (Sample):
[Refer to PDF for image: illustration]
Proposed FY 2014 Initiative Requests:
Proposed Initiative & Affected Programs: Program XX;
Position Types:
RA:
TE:
RO:
Mgr:
SPT:
Resource Request:
FTE:
Cost[A]:
Description: one or two sentences describing the purpose of new
resources. Note other important factors: General overview of
need/activity/impact;
Estimated impact[2]:
1. Estimated costs will be calculated by Finance using the FY 2013
Unit Cost Rates. Finance will also assist to determine managers and
support of necessary.
2. Estimated increase in number of closures or estimated LOS.
Source: IRS.
Note: Acronyms are as follows: RA = Revenue Agent; TE = Tax Examiner;
RO = Revenue Officer; Mgr = Manager; SPT = Specialists; FTE = Full
Time Equivalent; and LOS = Level of Service:
[End of figure]
[End of section]
Appendix IV: Reliability of Patient Protection and Affordable Care Act
Cost Estimate:
Figures 9 through 12 outline our assessment of the extent to which
IRS's updated, December 2012 Patient Protection and Affordable Care
Act (PPACA) cost estimate meets best practices. This information is
repeated in table 7, following the graphics.
Figure 9: PPACA Cost Estimate Alignment with Best Practices for
Comprehensiveness:
[Refer to PDF for image: interactive graphic]
Rollover each 'star' below to see further information on cost
estimation best practices.
Source: GAO analysis of IRS’s updated December 2012 PPACA cost
estimate and GAO-09-3SP.
To print a text version of this graphic, go to table 7.
[End of figure]
Figure 10: PPACA Cost Estimate Alignment with Best Practices for Being
Well Documented:
[Refer to PDF for image: interactive graphic]
Rollover each 'star' below to see further information on cost
estimation best practices.
Source: GAO analysis of IRS’s updated December 2012 PPACA cost
estimate and GAO-09-3SP.
To print a text version of this graphic, go to table 7.
[End of figure]
Figure 11: PPACA Cost Estimate Alignment with Best Practices for
Accuracy:
[Refer to PDF for image: interactive graphic]
Rollover each 'star' below to see further information on cost
estimation best practices.
Source: GAO analysis of IRS’s updated December 2012 PPACA cost
estimate and GAO-09-3SP.
To print a text version of this graphic, go to table 7.
[End of figure]
Figure 12: PPACA Cost Estimate Alignment with Best Practices for
Credibility:
[Refer to PDF for image: interactive graphic]
Rollover each 'star' below to see further information on cost
estimation best practices.
Source: GAO analysis of IRS’s updated December 2012 PPACA cost
estimate and GAO-09-3SP.
To print a text version of this graphic, go to table 7.
[End of figure]
Table 7: Non-Interactive Version of Figures 9 through 12: PPACA Cost
Estimate Alignment with Best Practices Outlined in the GAO Cost Guide:
Best practices characteristics: (1) A comprehensive cost estimate: ;
Overall assessment: Substantially meets best practices for a
comprehensive cost estimate;
Assessment of whether best practices are met: [Empty];
Effect: [Empty].
Best practices characteristics: Includes all life-cycle costs;
A life-cycle cost estimate provides a complete and structured
accounting of all resources and associated cost elements required to
develop, produce, deploy, and sustain a particular program. It should
cover the inception of the program through its retirement;
Overall assessment: [Empty];
Assessment of whether best practices are met: The cost estimate
included both government and contractor costs of the program over its
full life cycle, from inception of the program through development,
deployment, and operation and maintenance to its eventual retirement.
(Meets);
Effect: [A].
Best practices characteristics: Completely defines the program,
reflects the current schedule, and is technically reasonable;
The cost estimate should be based on a documented technical baseline
description, which provides a common definition of the program,
including detailed technical, program, and schedule descriptions of
the system;
Overall assessment: [Empty];
Assessment of whether best practices are met: Documentation included a
description of technical requirements for all affordable care act
components, with sufficient detail on the system's purpose and
performance characteristics. It did not explain how the system fits
into certain other aspects of program management, such as personnel
requirements. Additionally, risks and their specific effects on cost
elements were not documented in sufficient detail. (Substantially
meets);
Effect: [A].
Best practices characteristics: Has a product-oriented work breakdown
structure (WBS), traceable to the program's technical scope at an
appropriate level of detail;
A WBS provides a basic framework for a variety of related activities
like estimating costs, developing schedules, identifying resources and
potential risks, and providing the means for measuring program status
using earned value management (EVM). It is product-oriented if it
allows a program to track cost and schedule by defined deliverables,
such as a hardware or software component;
Overall assessment: [Empty];
Assessment of whether best practices are met: The WBS clearly outlined
the end product and major work of the program. It is standardized so
that cost data can be collected and used for estimating future
programs. IRS provided a generic dictionary that discussed major WBS
elements. (Meets);
Effect: [A].
Best practices characteristics: Documents all cost-influencing ground
rules and assumptions; Cost estimates are typically based on limited
information and therefore need to be bound by ground rules and
assumptions. Ground rules are a set of estimating standards that
provide guidance and common definitions, while assumptions are
judgments about past, present, or future conditions that may affect
the estimate. Any risks associated with assumptions should be
identified and traced to specific WBS elements;
Overall assessment: [Empty];
Assessment of whether best practices are met: The cost estimate
documentation defined and documented ground rules and assumptions.
However, the estimate did not explain how risks trace to specific WBS
elements and did not consider the effects of schedule and funding
delays. (Substantially meets);
Effect: [A].
Best practices characteristics: (2) A well documented cost estimate
should:
Overall assessment: Substantially meets best practices for a well
documented cost estimate;
Assessment of whether best practices are met: [Empty];
Effect: [Empty].
Best practices characteristics: Capture the source data used, the
reliability of the data, and how the data were made compatible with
other data in the estimate;
Data should be collected from primary sources. The source, content,
time, and units should be adequately documented. Further, data should
be analyzed to determine accuracy and reliability, and to identify
cost drivers;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS used two
commercially available software models to develop the estimate. IRS
documented some inputs, including labor rates and support activities,
but GAO could not confirm whether inputs to the software models were
appropriate for the program. (Substantially meets);
Effect: [A].
Best practices characteristics: Describe the calculations and the
methodology used to derive each element's cost;
Documentation should describe what calculation methods are used, as
well as how they were applied, and explain any anomalies;
Overall assessment: [Empty];
Assessment of whether best practices are met: The cost estimate
provided a general summary of the methodologies used to create it. IRS
used some actual data from parts of the program that it already
developed, and documented how those data were adjusted, but did not
explain why the data were adjusted. (Substantially meets);
Effect: [A].
Best practices characteristics: Describe how the estimate was
developed;
The data supporting the estimate should be available and adequately
documented so that the estimate can be easily updated to reflect
actual costs or program changes;
Overall assessment: [Empty];
Assessment of whether best practices are met: The estimate showed
inputs to the software models, including data provided by subject
matter experts. However, IRS used an incorrect method to calculate
confidence levels for the estimate. (Substantially meets);
Effect: [A].
Best practices characteristics: Discuss the technical baseline
description;
A technical baseline description provides a common definition of the
program, including detailed technical, program, and schedule
descriptions of the system, for a cost estimate to be built on. The
data in the technical baseline should be consistent with the cost
estimate;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS developed a
technical baseline description that is consistent with the cost
estimate. (Meets);
Effect: [A].
Best practices characteristics: Provide evidence of management review
and acceptance;
There should be a briefing to management, including a clear
explanation of how the cost estimate was derived. Management's
acceptance of the cost estimate should be documented;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS provided evidence
that staff briefed management on the cost estimate multiple times, and
provided email documentation of management feedback and approval, but
the briefings did not contain technical details of the cost estimate.
(Substantially meets);
Effect: [A].
Best practices characteristics: (3) An accurate cost estimate:
Overall assessment: Partially meets best practices for an accurate
cost estimate;
Assessment of whether best practices are met: [Empty];
Effect: [Empty].
Best practices characteristics: Produces unbiased results;
Cost estimates should have an uncertainty analysis, which determines
where the estimate falls against the range of all possible costs;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS developed the cost
estimate at an 80 percent confidence level, which is slightly
conservative compared to best practices, which call for estimates to
fall between 55 percent and 65 percent confidence levels.
(Substantially meets);
Effect: [A].
Best practices characteristics: Is properly adjusted for inflation;
Cost data should be adjusted for inflation to ensure that comparisons
and projections are valid. Data should also be normalized to constant
year dollars to remove the effects of inflation. Also, inflation
assumptions must be well documented;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS adjusted future
costs for inflation, and documented inflation rates, but reported past
costs in current year dollars. (Partially meets);
Effect: Adjusting for inflation is important because in the
development of an estimate, cost data must be expressed in like terms.
If a mistake is made or the inflation amount is not correct, cost
overruns can result.
Best practices characteristics: Contains few mistakes;
Results should be checked for accuracy, double counting, and
omissions. Validating that a cost estimate is accurate requires
thoroughly understanding and investigating how the cost model was
constructed;
Overall assessment: [Empty];
Assessment of whether best practices are met: Our assessment detected
only one minor mistake, and IRS confirmed that it was a typographical
error. (Substantially meets);
Effect: [A].
Best practices characteristics: Is regularly updated to reflect
significant program changes;
The cost estimate should be updated to reflect significant program
changes, such as changes to schedules or other assumptions. Updates
should also reflect actual costs so that the estimate always reflects
the current program status;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS updates the PPACA
cost estimate annually. The estimate included sunk costs incurred
through September 2012. IRS did not use Earned Value Management, which
would enable it to continuously incorporate actual cost and schedule
information. (Partially meets);
Effect: If a cost estimate is not properly updated on a regular basis,
it cannot provide decision makers with accurate information for
assessing alternative decisions.
Best practices characteristics: Documents and explains variances
between planned and actual costs;
Variances between planned and actual costs should be documented,
explained, and reviewed. For any elements whose actual costs or
schedules differ from the estimate, the estimate should discuss
variances and lessons learned;
Overall assessment: [Empty];
Assessment of whether best practices are met: The estimate showed how
it varies from a previous estimate, but it did not explain factors
behind the variances. (Minimally meets);
Effect: Without a documented comparison between the current estimate
(updated with actual costs) and the old estimate, cost estimators
cannot determine the level of variance between the two estimates. That
is, the estimators cannot see how well they are estimating and how the
program is changing over time.
Best practices characteristics: Reflects cost estimating experiences
from comparable programs;
The estimate should be based on historical cost estimation data and
actual experiences from other comparable programs. These data should
be reliable and relevant to the new program;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS collected sunk cost
data from the program's initiation in fiscal year 2010 through
September 2012 and used those data to inform the estimate. IRS also
used historical data from other comparable programs. (Substantially
meets);
Effect: [A].
Best practices characteristics: The estimating technique for each cost
element was used appropriately;
A variety of techniques can be used to estimate costs, including
extrapolating from actual costs, expert opinion, and analogy to other
programs. Estimators should use an appropriate technique for each cost
element;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS used commercially
available models to estimate software development costs, which is a
reasonable method. (Substantially meets);
Effect: [A).
Best practices characteristics: (4) A credible cost estimate includes:
Overall assessment: Partially meets best practices for a credible cost
estimate;
Assessment of whether best practices are met: [Empty];
Effect: [Empty].
Best practices characteristics: A sensitivity analysis that identifies
a range of possible costs based on varying inputs;
A sensitivity analysis examines how changes to key assumptions and
inputs affect the estimate. The estimate should identify key cost
drivers, examine their parameters and assumptions, and re-estimate the
total cost by varying each parameter between its minimum and maximum
range;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS assessed two cost
drivers for its sensitivity analysis: labor mix and development team
capability. However, it is not clear how those cost drivers were
identified. (Partially meets);
Effect: Without a sensitivity analysis that reveals how the cost
estimate is affected by a change in a single assumption, the cost
estimator will not fully understand which variable most affects the
cost estimate.
Best practices characteristics: A risk and uncertainty analysis;
A risk and uncertainty analysis recognizes the potential for error and
attempts to quantify it by identifying the effects of changing key
cost drivers;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS developed multiple
risk management plans and conducted a risk and uncertainty analysis,
but it is unclear how the risk management plans are applied to address
the risks identified in the cost estimate. In addition, IRS
incorrectly treated the total funding risk for the entire program as
equal to the sum of the risks of individual elements. (Partially
meets);
Effect: For management to make good decisions, the program estimate
must reflect the degree of uncertainty, so that a level of confidence
can be given about the estimate. An estimate without risk and
uncertainty analysis is unrealistic because it does not assess the
variability in the cost estimate from such effects as schedules
slipping, missions changing, and proposed solutions not meeting users'
needs.
Best practices characteristics: Cross-checking of major cost elements;
A cross-check is done by using a different cost estimation method to
see if it produces similar results;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS provided a table
showing how cost elements were cross-checked, but did not provide
supporting documentation. (Substantially meets);
Effect: [A].
Best practices characteristics: A comparison to an independent cost
estimate conducted by another organization; A second, independent cost
estimate should be performed to validate the original cost estimate.
It should be based on the same technical baseline, ground rules, and
assumptions as the original estimate;
Overall assessment: [Empty];
Assessment of whether best practices are met: IRS did not prepare a
second cost estimate to validate the original estimate and thus
provide assurance of its quality. (Minimally meets);
Effect: Preparing two cost estimates is considered one of the best and
most reliable methods for validation. It provides an independent view
of expected program costs that tests the original estimate for
reasonableness. Without a second cost estimate, decision makers will
lack insight into a program's potential costs because cost estimates
frequently use different methods.
Source: GAO analysis of IRS's updated December 2012 PPACA cost
estimate and [hyperlink, http://www.gao.gov/products/GAO-09-3SP].
Note: We determined the overall assessment rating by assigning the
following ratings: Does Not Meet - IRS provided no evidence that
satisfies any of the criterion, Minimally Meets - IRS provided
evidence that satisfies a small portion of the criterion, Partially
Meets - IRS provided evidence that satisfies about half of the
criterion, Substantially Meets - IRS provided evidence that satisfies
a large portion of the criterion, Meets - IRS provided complete
evidence that satisfies the entire criterion.
[A] We did not describe effects for characteristics scored as "meets"
or "substantially meets."
[End of table]
[End of section]
Appendix V: Summary of IRS's Major Information Technology (IT)
Investments:
Investment name: Account Management Services (AMS);
Enhances customer support by providing applications that enable IRS
employees to access, validate, and update individual taxpayer accounts
on demand;
Fiscal year 2013 FTEs: 82;
Fiscal year 2013 funding type[A]: O&M;
Total obligations through fiscal year 2012 (in millions): $89.0;
Lifecycle costs (in millions): $212.0;
Percent of lifecycle costs obligated through fiscal year 2012: 42.0%;
Start Date: 2009;
Projected useful life: 2019.
Investment name: Customer Account Data Engine 2 (CADE 2);
Provides timely access to authoritative individual taxpayer account
information and enhances IRS's ability to address technology,
security, financial material weaknesses, and long-term architectural
planning and viability;
Fiscal year 2013 FTEs: 536;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $540.0;
Lifecycle costs (in millions): $1,479.0;
Percent of lifecycle costs obligated through fiscal year 2012: 36.5%;
Start Date: 2009;
Projected useful life: 2019.
Investment name: Electronic Fraud Detection System (EFDS);
Assists in detecting fraud at the time that tax returns are filed in
order to eliminate the issuance of fraudulent tax refunds;
Fiscal year 2013 FTEs: 44;
Fiscal year 2013 funding type[A]: O&M;
Total obligations through fiscal year 2012 (in millions): $92.0;
Lifecycle costs (in millions): $150.0;
Percent of lifecycle costs obligated through fiscal year 2012: 61.3%;
Start Date: 1996;
Projected useful life: 2015.
Investment name: e-Services (e-SVS);
Comprises several web-based self-assisted services that are intended
to allow authorized individuals to do business with the IRS
electronically;
Fiscal year 2013 FTEs: 37;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $162.0;
Lifecycle costs (in millions): $211.0;
Percent of lifecycle costs obligated through fiscal year 2012: 76.8%;
Start Date: 1999;
Projected useful life: 2019.
Investment name: Foreign Account Tax Compliance Act (FATCA);
Intended to implement provisions of the Foreign Account Tax Compliance
Act that require financial accounts held by U.S. taxpayers, or by
foreign entities in which U.S. taxpayers hold a substantial ownership
interest;
Fiscal year 2013 FTEs: 31;
Fiscal year 2013 funding type[A]: DME;
Total obligations through fiscal year 2012 (in millions): $8.0;
Lifecycle costs (in millions): $91.0;
Percent of lifecycle costs obligated through fiscal year 2012: 8.8%;
Start Date: 2011;
Projected useful life: 2019.
Investment name: Implement Return Review Program (RRP) (Replaces EFDS);
Currently under development, is intended to maximize fraud detection
at the time that tax returns are filed in order to eliminate issuance
of questionable refunds;
Fiscal year 2013 FTEs: 78;
Fiscal year 2013 funding type[A]: DME;
Total obligations through fiscal year 2012 (in millions): $60.0;
Lifecycle costs (in millions): $169.0;
Percent of lifecycle costs obligated through fiscal year 2012: 35.5%;
Start Date: 2010;
Projected useful life: 2019.
Investment name: Individual Master File (IMF);
Represents the authoritative data source for individual tax account
data. All other IRS information systems that process IMF data depend
on output from this source. This investment is a critical component of
IRS's ability to process tax returns;
Fiscal year 2013 FTEs: 37;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $71.0;
Lifecycle costs (in millions): $108.0;
Percent of lifecycle costs obligated through fiscal year 2012: 65.7%;
Start Date: 1970;
Projected useful life: 2019.
Investment name: Information Reporting and Document Matching (IRDM);
Intended to establish a new business information matching program in
order to increase voluntary compliance and accurate income reporting;
Fiscal year 2013 FTEs: 76;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $70.0;
Lifecycle costs (in millions): $186.0;
Percent of lifecycle costs obligated through fiscal year 2012: 37.6%;
Start Date: 2009;
Projected useful life: 2019.
Investment name: Integrated Customer Communication Environment (ICCE);
Includes several projects that are intended to simplify voluntary
compliance using voice response, Internet, and other computer
technology such as the Modernized Internet Employee Identification
Number, which allows third parties to act on the behalf of taxpayers;
Fiscal year 2013 FTEs: 73;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $467.0;
Lifecycle costs (in millions): $534.0;
Percent of lifecycle costs obligated through fiscal year 2012: 87.5%;
Start Date: 1996;
Projected useful life: 2019.
Investment name: Integrated Data Retrieval System (IDRS);
Intended to provide systemic review, improve consistency in case
control, alleviate staffing needs, issue notices to taxpayers, and
allow taxpayers to see status of refunds. It is a mission-critical
system used by 60,000 IRS employees;
Fiscal year 2013 FTEs: 129;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $186.0;
Lifecycle costs (in millions): $322.0;
Percent of lifecycle costs obligated through fiscal year 2012: 57.8%;
Start Date: 1973;
Projected useful life: 2019.
Investment name: Integrated Financial System/CORE Financial System
(IFS);
Used by IRS for budget, payroll, accounts payable/receivable, general
ledger functions, and financial reporting;
also used to report on the cost of operations and to manage budgets by
fiscal year;
Fiscal year 2013 FTEs: 11;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $398.0;
Lifecycle costs (in millions): $483.0;
Percent of lifecycle costs obligated through fiscal year 2012: 82.4%;
Start Date: 2001;
Projected useful life: 2019.
Investment name: Integrated Submission and Remittance Processing
System (ISRP);
Processes paper tax returns, and updates tax forms to comply with tax
law changes;
Fiscal year 2013 FTEs: 16;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $132.0;
Lifecycle costs (in millions): $192.0;
Percent of lifecycle costs obligated through fiscal year 2012: 68.8%;
Start Date: 1998;
Projected useful life: 2019.
Investment name: IRS End User Systems and Services (EUSS);
Supports products and services necessary for daily functions for over
100,000 IRS employees at headquarters and field sites;
Fiscal year 2013 FTEs: 1155;
Fiscal year 2013 funding type[A]: O&M;
Total obligations through fiscal year 2012 (in millions): $511.0;
Lifecycle costs (in millions): $1,684.0;
Percent of lifecycle costs obligated through fiscal year 2012: 30.3%;
Start Date: 1970;
Projected useful life: 2025.
Investment name: IRS Main Frames and Servers Services and Support
(MSSS);
Intended to support the design, development, and deployment of server
storage infrastructures, software, databases, and operating systems;
Fiscal year 2013 FTEs: 1586;
Fiscal year 2013 funding type[A]: O&M;
Total obligations through fiscal year 2012 (in millions): $3,620.0;
Lifecycle costs (in millions): $6,016.0;
Percent of lifecycle costs obligated through fiscal year 2012: 60.2%;
Start Date: 1970;
Projected useful life: 2025.
Investment name: IRS Telecommunications Systems and Support (TSS);
Supports IRS's broad and local network infrastructure, such as servers
and switches for voice, data, and video servicing of about 1,000 IRS
sites;
Fiscal year 2013 FTEs: 425;
Fiscal year 2013 funding type[A]: O&M;
Total obligations through fiscal year 2012 (in millions): $710.0;
Lifecycle costs (in millions): $2,583.0;
Percent of lifecycle costs obligated through fiscal year 2012: 27.5%;
Start Date: 2002;
Projected useful life: 2021.
Investment name: IRS.Gov - Portal Environment;
Provides web-based services (such as tax filing and refund tracking)
to internal and external users, such as IRS employees and other
government agencies, taxpayers, and business partners;
Fiscal year 2013 FTEs: 17;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $403.0;
Lifecycle costs (in millions): $612.0;
Percent of lifecycle costs obligated through fiscal year 2012: 65.8%;
Start Date: 2009;
Projected useful life: 2020.
Investment name: Modernized e-File (MeF);
Provides a secure web-based platform for electronic tax filing of
individual and business tax and information returns by registered
Electronic Return Originators;
Fiscal year 2013 FTEs: 77;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $304.0;
Lifecycle costs (in millions): $575.0;
Percent of lifecycle costs obligated through fiscal year 2012: 52.9%;
Start Date: 2001;
Projected useful life: 2019.
Investment name: Service Center Recognition/Image Processing System
(SCRIPS);
Used as a data capture, management, and image storage system using
high-speed scanning and digital imaging to convert data from the 940,
941, K-1, and paper returns from Information Returns Processing into
electronic format;
Fiscal year 2013 FTEs: 15;
Fiscal year 2013 funding type[A]: O&M and DME;
Total obligations through fiscal year 2012 (in millions): $145.0;
Lifecycle costs (in millions): $195.0;
Percent of lifecycle costs obligated through fiscal year 2012: 74.4%;
Start Date: 1993;
Projected useful life: 2019.
Source: GAO analysis of IRS's fiscal year 2014 congressional budget
justification and Exhibit 300A data.
[A] O&M = Operations and Maintenance; DME = Development,
Modernization, and Enhancement.
[End of table]
[End of section]
Appendix VI: Comments from the Internal Revenue Service:
IRS Agency Comments on the Draft Report: GAO-13-835:
IRS 2014 Budget: Improvements Made to Budget Request and Cost
Estimate, but Further Actions Needed:
Recommendation #1: Improve guidance given to business units for the
pre-selection budget formulation process, emphasizing the importance
of information on the estimated impact—qualitative or quantitative—of
proposed budget initiatives.
Comments: The IRS agrees with this recommendation. For the FY 2016
budget formulation cycle, the IRS will provide the business units with
more detailed instructions on completing the pre-selection templates,
emphasizing the importance of providing information on the estimated
impact – qualitative or quantitative – of proposed budget initiatives.
Recommendation #2: Improve the accuracy and credibility of future
updates to the PPACA cost estimate by taking the following actions to
more closely follow best practices outlined in the GAO Cost Guide:
* Use earned value management to capture actual costs and use them as
a basis for future updates.
* Explain why variances between the current estimate and previous
estimates occurred.
* Document how cost drivers are selected for future sensitivity
analyses.
* Conduct future risk and uncertainty analyses consistent with best
practices, and develop and document plans to address risks.
* Validate the original cost estimate by preparing a second,
independent cost estimate.
Comments: The IRS agrees with the majority of the actions in this
recommendation. We partially disagree with the action concerning the
use of the Earned Value Management (EVM) data as a best practice and
we disagree with the action to have a second organization, outside of
the Estimation Program Office (EPO) and the Affordable Care Act (ACA)
Program Management Office (PMO), conduct a second, independent cost
estimate.
As previously stated in the GAO report, Information Technology:
Consistently Applying Best Practices Could Help IRS Improve the
Reliability of Reported Cost and Schedule Information, GAO-13-401, EVM
is not part of our current program management processes since we
believe the cost and burden to use it outweigh the value added.
However, we agree that we should capture actual costs and use them as
a basis for future updates by using a pragmatic approach that is
consistent with IRS information technology (IT) management best
practices.
The IRS does not support having a second organization, outside of EPO
and ACA PMO, provide a second, independent cost estimate of the same
scope as the Patient Protection Affordable Care Act (PPACA) estimate
that was the subject of the GAO audit since the cost and burden to
have an external organization develop an estimate outweighs the value
added. Additionally, we believe that outside vendors would lack the
historical knowledge of IRS IT development practices and their
associated costs to produce reasonable estimates. There would be a
tremendous learning curve for any vendor to produce an independent
estimate and they would likely end up heavily leveraging EPO for
information which would call their independence into question.
Recommendation #3: Report publicly the ACA IT investment as a major
investment on the OMB IT Dashboard and the fiscal year 2015 budget
request, including standard cost, schedule, and performance
information.
Comments: The IRS agrees with this recommendation. The IRS has
completed a FY 2015 Exhibit 300 for the ACA IT investment. The ACA IT
investment, including standard cost, schedule and performance
information, will be reported publicly as a major investment on the
OMB Dashboard and in the fiscal year 2015 budget request.
Recommendation #4: Report key data on major IT investments in one
consolidated document, such as the Congressional Justification, in
consultation with congressional stakeholders.
Comments: The IRS agrees with this recommendation. In the FY 2014
Congressional Justification, the IRS included the following useful
information related to its portfolio of Major IT Investments:
* Name and Description;
* Immediate cost (defined as the base FY 2013 budget plus FY 2014
request);
* Full life cycle cost of the asset;
* Projected useful life of the current asset;
* Timeframe for the “development, modernization, and enhancement”
(DME) or “operations and maintenance” (O&M) phase of the investment;
* Anticipated benefit(s) of the investment;
* How performance will be measured and evaluated.
In order to include all IT investment key data in one place, as
requested by congressional stakeholders, the IRS plans to also include
information from the Exhibit 300s in the upcoming year’s congressional
justification, adding:
* Start date of Major IT Investment;
* Actual obligations for the investment to date.
[End of section]
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. McTigue, Jr. (202) 512-9110, mctiguej@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Libby Mixon, Assistant
Director; Remmie Arnold, Amy Bowser, Jennifer Echard, Emile Ettedgui,
Mary Evans, Chuck Fox, Paul Middleton, Donna L. Miller, Edward
Nannenhorn, Karen O'Conor, Sabine Paul, Laurel Plume, Karen Richey,
Erinn L. Sauer, Cynthia Saunders, and Robert Yetvin made major
contributions to this report.
[End of section]
Footnotes:
[1] Fiscal year 2013 funding levels reported in IRS's fiscal year 2014
congressional justification did not include reductions due to
sequestration and a rescission. In April 2013, IRS released its fiscal
year 2013 operating plan, which showed how reductions were implemented
due to sequestration and rescission. The final funding level for IRS
in fiscal year 2013 is $11.2 billion.
[2] GAO, Internal Revenue Service: Preliminary Observations on the
Fiscal Year 2014 Budget Request, [hyperlink,
http://www.gao.gov/products/GAO-13-599R], (Washington, D.C.: May 3,
2013). Internal Revenue Service: 2013 Tax Filing Season Performance to
Date and Budget Data, [hyperlink,
http://www.gao.gov/products/GAO-13-541R], (Washington, D.C.: April 15,
2013).
[3] The BSM appropriation provides resources for the planning and
capital asset acquisition of IT to modernize the IRS business systems,
such as Customer Account Data Engine 2 (CADE 2) and Modernized e-File.
[4] Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by
the Health Care and Education Reconciliation Act (HCERA), Pub. L. No.
111-152, 124 Stat. 1029 (Mar. 30, 2010). All references to PPACA
include amendments by HCERA.
[5] GAO, Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP]
(Washington, D.C.: Mar. 2, 2009).
[6] Office of Management and Budget, Guidelines and Discount Rates for
Benefit-Cost Analysis of Federal Programs, OMB Circular No. A-94
(revised October 1992).
[7] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). GPRA was updated
by the GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat.
3866 (Jan. 4, 2011). IRS's strategic goals are to (1) improve service
to make voluntary compliance easier, and (2) enforce the law to ensure
everyone meets their obligation to pay taxes.
[8] IRS is restricted from reprogramming funds within its
appropriation accounts without committee approval if, among other
reasons, the reprogramming will augment existing programs, projects,
or activities in excess of $5 million or 10 percent, whichever is
less. See, for example, the Financial Services and General Government
Appropriations Act, 2012, Pub. L. No. 112-74, div. C, title VI, § 608,
125 Stat. 786, 924 (Dec. 23, 2011).
[9] GAO, Internal Revenue Service: Assessment of Budget Justification
for Fiscal Year 2011 Identified Opportunities to Enhance Transparency,
[hyperlink, http://www.gao.gov/products/GAO-10-687R] (Washington,
D.C.: May 26, 2010).
[10] We selected the eight areas based on several criteria, such as
whether it was included in the proposed fiscal year 2014 budget
initiatives or the topic of prior GAO work. See appendix I for a full
description of our scope and methodology.
[11] We only requested fiscal year 2012 obligations data for the
Appeals and Wage and Investment fund centers to obtain both a simple
and complex example of the information available.
[12] In March 2013, we reported that since 2003, IRS had carried out
four offshore voluntary disclosure programs that offered incentives
for taxpayers to disclose their offshore accounts and pay delinquent
taxes, interest, and penalties. The first three programs occurred in
2003, 2009, and 2011. The fourth program started in 2012 and did not
have an end date as of September 2013. See GAO, Offshore Tax Evasion:
IRS Has Collected Billions of Dollars, but May be Missing Continued
Evasion, [hyperlink, http://www.gao.gov/products/GAO-13-318]
(Washington, D.C.: Mar. 27, 2013).
[13] The new pre-selection process does not include proposed IT-
related program initiatives. New IT funding requests have been using a
similar pre-selection budget formulation process for several years.
[14] Business cases may ultimately be included in the budget request.
[15] OMB Circular No. A-94.
[16] The base budget is the estimated funding necessary to maintain
the current level of services without increases for new program
initiatives.
[17] Other than personnel costs, rent and related infrastructure costs
represent one of the largest line items in the IRS budget. Although
this initiative began during fiscal year 2011, the IRS did not know
the magnitude of these savings until the fiscal year 2014 budget
formulation process. Plans for closures, consolidations, and space
reductions fall into three categories: small posts-of-duty offices (25
or fewer employees), mid-size and large posts-of-duty (generally more
than 40,000 square feet), and space reduction projects.
[18] IRS develops ROI projections by dividing projected revenue by
projected cost. IRS's ROI calculations do not reflect benefits from
improved voluntary compliance and taxpayer compliance costs. IRS's ROI
estimates provide useful information but-given the limits of current
data, are not complete estimates of benefits and costs.
[19] In May 2013, we recommended that IRS make all data from certain
electronically submitted tax returns available to examiners conducting
classification. See Tax Administration: IRS Could Improve Examinations
by Adopting Certain Research Program Practices, [hyperlink,
http://www.gao.gov/products/GAO-13-480] (Washington, D.C.: May 24,
2013).
[20] IRS officials have told us that ROI is not the only factor used
in determining which new initiatives to request funding for. The
"Leverage Data to Include Case Selection" initiative includes a pilot
in which future policy decisions will be made based on the research
results. For fiscal year 2014, IRS requested funding for two other
enforcement initiatives for which no ROI was provided, "Build Out Tax
Return Preparer Compliance Activities" and "Leverage Digital Evidence
for Criminal Investigation."
[21] GAO, IRS 2013 Budget: Continuing to Improve Information on
Program Costs and Results Could Aid in Resource Decision Making,
[hyperlink, http://www.gao.gov/products/GAO-12-603] (Washington, D.C.:
June 8, 2012).
[22] [hyperlink, http://www.gao.gov/products/GAO-09-3SP].
[23] [hyperlink, http://www.gao.gov/products/GAO-12-603]. As a result
of our previous assessment, IRS's updated PPACA cost estimate
specifies that it is intended to follow best practices from the GAO
Cost Guide. IRS awarded a contract to update portions of the cost
estimate, and it also directed the contractor to follow best practices
outlined in the GAO Cost Guide.
[24] For more information on IRS's implementation of PPACA, see
Patient Protection and Affordable Care Act: IRS Managing
Implementation Risks, but Its Approach Could Be Refined, [hyperlink,
http://www.gao.gov/products/GAO-12-690] (Washington, D.C.: June 13,
2012).
[25] According to IRS, major investments are defined by Treasury as
those that cost $10 million in either the current year or budget year,
or $50 million over the 5-year period extending from the prior year
through budget year +2.
[26] The IT Dashboard [hyperlink, https://www.itdashboard.gov/] is a
website enabling federal agencies, industry, the general public, and
other stakeholders to view details of federal IT investments. The
purpose of the Dashboard is to provide information on the
effectiveness of government IT programs and to support decisions
regarding the investment and management of resources.
[27] The Exhibit 300, "Capital Asset Summary," is used to justify
resource requests for major IT investments and is intended to enable
an agency to demonstrate to its own management (as well as to OMB)
that a major investment is well planned. Exhibits 300 for major IRS IT
investments are available on the Dashboard.
[28] Life-cycle costs are the overall estimated costs (including
direct and indirect initial costs plus any periodic or continuing
costs of operation and maintenance), both government and contractor,
for a particular program alternative over the time period
corresponding to the life of the program.
[29] Redacted Exhibit 300s do not include sensitive data, such as
estimated obligations for future budget years, names and contact
information, and operational risks.
[30] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1],
(Washington, D.C.: November 1999).
[31] See Financial Services and General Government Appropriations Act,
2012, Pub. L. No. 112-74, div. C, title I, 125 Stat. 786, 888 (Dec.
23, 2011). See also, H.R. Rep. No. 112-331, at 901 (2011). .
[32] GAO, Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP]
(Washington, D.C.: Mar. 2, 2009).
[33] See GAO, Financial Audit: IRS's Fiscal Years 2012 and 2011
Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO-13-120] (Washington, D.C.: Nov. 9,
2012).
[34] Office of Management and Budget, Revised, Guidelines and Discount
Rates for Benefit-Cost Analysis for Federal Programs, OMB Circular No.
A-94, (Revised October 1992).
[35] Because it is IRS's policy to treat paper-filed returns the same
as electronically filed returns, IRS does not use data that is not
transcribed from paper returns in its classification process. This
process determines, in part, whether a return should be selected for
examination, what issues should be examined, and how the examination
should be conducted.
[36] See GAO, Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP]
(Washington, D.C.: Mar. 2, 2009).
[37] 40 U.S.C. § 11302(c). Office of Management and Budget, Capital
Programming Guide: Planning, Budgeting, and Acquisition of Capital
Assets, Supplement to Circular A-11, (Washington, D.C.: August 2011).
[End of section]
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E-mail: fraudnet@gao.gov;
Automated answering system: (800) 424-5454 or (202) 512-7470.
Congressional Relations:
Katherine Siggerud, Managing Director, siggerudk@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, DC 20548.
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, DC 20548.
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